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What past market declines can teach us

The types of market declines, plus lessons learned from past corrections.

Stock market corrections are an inevitable part of investing. They’re also the last thing most investors want to experience. Here is some historical background to help you put market declines in perspective.

Types of stock market declines

A look back at stock market history since 1900 shows that declines have varied widely in intensity, length and frequency. In the midst of a decline, it’s been nearly impossible to tell the difference between a slight dip and a more prolonged correction.

The table below shows how frequently declines in the Dow Jones Industrial AverageSM have occurred since 1900. As you can see, they have been somewhat regular events.

A history of declines (1900–December 2013)

Type of decline Average frequency1 Average length2 Last occurrence Previous occurrence
–5% or more
About 3 times a year 47 days October 2013 August 2013
–10% or more
About once a year 115 days October 2011 July 2010
–15% or more
About once every 2 years 216 days October 2011 March 2009
–20% or more
About once every 3 ½ years 338 days March 2009 October 2002

Past results are not predictive of results in future periods.

Source: Capital Research and Management CompanySM

1 Assumes 50% recovery rate of lost value.

2 Measures market high to market low.

Lessons from market declines

What lessons can we learn from past market declines?

  1. No one can predict consistently when market declines will happen.

    It’s easy to look back today and say with hindsight that the stock market was overvalued at a particular time and due for a decline. But no one has been able to accurately predict market declines on a consistent basis. In January 1973, a New York TimesSM poll of 8 market authorities predicted that the market would “move somewhat higher” in the future. The Dow industrials proceeded to decline 45% over the next 23 months. Then, although almost no one predicted it, the Dow rose 38% in 1975.

  2. No one can predict how long a decline will last.

    Since 1982, with few exceptions, market declines have been relatively brief. Earlier market declines have lasted longer. After the 1929 crash, it took investors 16 years to restore their investments if they invested at the market high. In 2000, it took about 5 years. But after the 1987 crash, it took about 23 months to get back. In 1990, it took about 8 months. All cases assume dividends were reinvested.

  3. No one can consistently predict the right time to get in or out of the market.

    Successful market timing during a decline is extremely difficult because it requires 2 near-perfect actions: getting out and then getting back in at the right time. A common mistake investors make is to lose patience and sell at or near the bottom of a downturn. But even if you have decent timing and get out early in a decline, you still have to figure out when to get back in. A bear market is not usually characterized by a straight-line decline in stock prices. Instead, the market’s downward trend is likely to be jagged — showing bursts of stock price increases, known as “sucker’s rallies,” and then declines.

Living with a market decline isn’t easy, but if you understand these lessons, you’ll be a more intelligent investor.

Note: Be sure to discuss these issues with your financial adviser before making any changes to your financial plan.

Investors should carefully consider investment objectives, risks, charges and expenses. This and other important information is contained in the fund prospectuses and summary prospectuses, which can be obtained from a financial professional and should be read carefully before investing. Investments are not FDIC-insured, nor are they deposits of or guaranteed by a bank or any other entity, so they may lose value.