For many advisors, 2022’s market swings have come with numerous phone calls from concerned clients wondering whether to buy, sell, or hold on for the ride. A look at the market’s performance following the greatest declines since WWII points to a few valuable lessons.

Each table below highlights significant downturns of the S&P 500^® Index, along with performance in subsequent time periods following those downturns. Since WWII, there have been nine quarterly declines of more than 15%, including Q2 2022. 

15%+ Quarterly Drops for the S&P 500: Post-WWII

20%+ Two Quarter Drops for the S&P 500: Post-WWII

Lesson #1: Time in the market matters, especially following a correction

The first point the tables make is that some of the strongest-performing markets have taken place in the months following significant downturns. Table 1 shows an average return of 26% in the 12-month period following market declines of greater than 15%. In Table 2, that average increases to 31% following two-quarter corrections of greater than 20%.

While averages can be deceptive, telling only part of the story, these numbers point to a central tenet of financial wisdom: Investors who react emotionally by selling during market downturns and then try to time the upswing oftentimes miss some of the market’s best days. Missing even a few of the best days of performance can dramatically reduce portfolio returns.

The fact is, trying to time the market remains one of the most common ways individual investors lose money. According to research firm Dalbar, the average individual stock market investor earned 10% less than the S&P 500 in 2021 (18.39% vs. 28.71%)—the third-largest underperformance ever observed in the firm’s QAIB study, which began in 1985.¹ This is, primarily, due to poor timing decisions made by investors. Dalbar states “…fund investors who remained patient and didn’t focus on short-term market gyrations were significantly more successful than those who let their emotions override a longer-term strategy to build wealth.”² 

Lesson #2: Despite any evidence to the contrary, the stock market is still unpredictable

This point may seem obvious, but it’s a concept that remains critical to grasp. Market patterns are inherently unpredictable and can reverse on a dime. For example, Table 1 shows that the two most recent corrections of the S&P 500 before this year produced radically different results in the subsequent quarter. Following the Dec. ’08 decline of -22.56%, investors would have been down an additional -11.67%, while the -20.00% decline of March ’20 was followed by a 19.95% upswing.  

Also in Table 1, the 12 months of performance following each market decline range from an increase of 53.71% to an almost flat return of 1.00%. Like this summer’s market rally, these upswings after significant market corrections are often unloved, but being invested and participating in them is a significant part of building long-term wealth.  

The long and short of it is that there is no formula for accurately predicting the markets. In addition, the adage “Investing is like a bar of soap; the more you handle your money, the less you have of it” holds some truth. The question of whether to buy, sell, or hold on should be redirected to a client’s long-term financial plan—one that takes into account their personal tolerance for risk and long-term goals. History shows that sticking to a well-structured plan through market swings is an investor’s best bet.