Putting The 2022 Stock Market Decline In Perspective


Last year’s stock market performance was not what anyone would have wanted, but it was to be expected. For those keeping score, it was the largest yearly decline since 2008. That could be catastrophic for someone who initially invested in January 2022 with just a one-year time horizon. But most investors don’t invest for a one-year period. They invest with their sights set on a long-term goal 10, 20 or 30 years out.

But even for someone who started investing just three years ago, their average annual return at the end of 2022 would have been 8.22%. For someone who began five years ago, their average annual return would have been 9.11%. A 10-year horizon ending in 2022 would have generated a 12.4% average annual return.

You see where I’m going with this. In a historical context, one year in the stock market has little impact on the positive returns generated over time. The 2008 stock market crash was devastating—the second most significant decline in history. But if you started investing in the market at the beginning of 2008 and stayed invested, you would have earned an average annual return of 9.43% per year by the end of 2022.

Keep A Historical Perspective

While no one can predict how much longer this bear market will last, we know that it won’t last. All bear markets run their course and give way to another bull market. On average, bear markets have lasted a little over nine months and since World War II have occurred about once every five and a half years. Over a 92-year span ending in 2021, bear markets ate just over 20 of those years, meaning stocks have seen positive years nearly 80% of the time.

Also, consider that the average annualized return of 9.82% in the S&P Index from 1928 through the end of 2022 includes all the bear markets. All told, there is a much stronger case for being in the market than out of it.

The crucial takeaway is that, since the inception of the stock market, bear markets have been nothing more than temporary pauses in a long-term advance. Some can be worse than others, but they have always allowed investors to build wealth over the long term by taking advantage of lower stock prices.

The net result is an extensive history of market cycles combining bull markets with bear markets and market corrections that produced positive returns in consecutive 20-year holding periods since the late 1880s. The stock market has never generated a negative return during any 20-year holding period.

A More Recent Perspective

Considering the current market environment may help investors understand that their position is not as untenable as it may seem. If you consider that the stock market loss in 2022—about 20%—merely gave back a portion of the gains the market generated in the prior year—about 27% in 2021—that means you’ve lost time, not necessarily any money.

In the very brief bear market of 2020, the stock market lost 34% in a one-month period, but it went on to gain more than 18% for the year. That was an extraordinary market event, condensing what typically takes a year or two to go from a bear market bottom to new market highs into less than six months. We may never see that happen again. Regardless, it follows the same historical trend repeated for nearly 100 years—a bear market followed by a bull market.

If you didn’t trust the historical trend and abandoned the market near its lows in 2020, it’s likely your investments never fully recovered.

The Biggest Threat With Volatility Is How You React To It

When the markets become volatile, your most significant risk is not declining stock prices. Instead, it’s how you react to it. The urge to flee the market to avoid further losses can be overpowering. But it is essential to keep in mind that the only way you can actually lose money is by selling when the market declines.

Investors who feel the urge to flee the market after it has already declined 15% or 20% will almost invariably lose money. Since its inception, the stock market has rewarded those who can withstand volatility and avoid dangerous behavioral mistakes through various market cycles.

It’s also important to remember that volatility is a two-way street. There can be as much volatility to the upside as there is to the downside. However, investors tend to only focus on the latter, which is why their investment performance can suffer. Twenty years of investor data shows that those who abandoned the market to avoid its worst days almost invariably miss the market’s best days, as well. That makes it very difficult to overcome the losses incurred and hurts overall investment performance.

Focus On What You Can Control

It’s impossible to predict what will happen in the stock market—tomorrow, a year from now or five years from now. So, it makes no sense to worry about short-term market fluctuations that will not impact your long-term investment objectives. Warren Buffett says he doesn’t think about the macro stuff, just what’s important and knowable. The only thing that is knowable and important for you is your long-term objectives and your investment strategy to achieve them.

Investors who are informed by a historical perspective of the market, as well as their financial plan, have a much easier time staying the course and enduring periods of market distress.


Jonathan Dash,
Founder and President
Email: info@dashinvestments.com

The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.