The Surprising Statistics Of Stock Market Corrections

Logan Kane profile picture
Logan Kane
20.37K Followers

Summary

  • Occasional price declines are a normal part of investing.
  • Many investors do not understand the mechanics behind stock market corrections and make suboptimal moves as a result.
  • By understanding the statistical nature of stock market declines and the optimal strategy around them, you can use declines to your benefit and ease your mind.
  • However, the often-touted strategy of waiting in cash for a pullback to buy tends to underperform.

Should I wait for a pullback to buy stocks?Investors typically have a vague idea of what they're getting themselves into by buying stocks but don't quite understand the mechanics behind market corrections. The mainstream media isn't helping investors make good decisions because creating fear drives viewership. Investors' memories are short, and market pullbacks are normal.

Personal finance writers and financial advisors often push suboptimal strategies that feel good, like excessively large cash allocations and dollar-cost averaging. By understanding what is statistically likely to happen, you can know what to expect when the market dips and answer other portfolio strategy questions, like whether you statistically do better waiting for pullbacks in cash or investing money immediately.

The stock market doesn't go straight up.

On any given day, stocks have roughly a 53 percent chance of rising and a 47 percent chance of falling. Over any given 3-month period, stocks rise 68 percent of the time, dropping the other 32 percent of the time. Over a typical 12-month period, the odds of making money in stocks rise to roughly 75 percent. However, if you are in the market for a long enough period of time, there is a 100 percent chance that you will experience temporary price declines at times.

Source: Thomson Reuters

After bottoming in early 2009, stocks have rallied massively but have not gone straight up. Recent history shows seven declines of 9.8 percent or more in the S&P 500 (SPY) since the bear market bottom (the current downturn is +/- 6 percent as of the time of writing this). Staying the course each time was the right move. By knowing what to expect from the market, we can sleep easier and make better investment decisions. In fact, we can make an educated guess about how often market corrections will occur in the future based on past data.

This article was written by

Logan Kane profile picture
20.37K Followers
Author and entrepreneur. My articles typically cover macroeconomic trends, portfolio strategy, value investing, and behavioral finance. I like to profit from the biases and constraints of other investors. My work is available along with 1,000+ other authors by subscribing to Seeking Alpha Premium.You can read some more of my work here on my Substack.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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