4 min read
Here is a look at the price of the S&P 500 from 1950 to 2018:
This simple graph shows what you can expect when you invest in the stock market: Over time, market prices generally increase, but the path to higher prices can be bumpy.
This bumpiness is known as “volatility” and it’s the reason many people are scared to invest in the stock market. In particular, many people fear potential market drops.
This leads to an interesting question: When the stock market does drop, how long does it take for prices to recover?
To answer this question, I downloaded historical yearly S&P 500 prices from 1950 – 2018 and looked at every instance where the S&P 500 dropped from previous highs and analyzed how long the subsequent recovery took.
It turns out that there were 11 periods from 1950 – 2018 when the S&P 500 dropped from its previous all-time high:
It’s a little hard to see the drops from 1950 – 1980 so let’s convert the y-axis to a log scale:
Now let’s check out how long each drop took to recover to the previous all-time high:
In 7 of the 11 drops, it only took one year for the S&P 500 to recover to its previous all-time high price.
In the most extreme drop, it took 8 years for S&P 500 prices to recover after the dot-com bubble burst in 2000, which was immediately followed by the crash of 2008. Following that crash, it took about 6 years for prices to recover to their previous all-time highs.
- In general, the stock market is incredibly resilient in its recoveries from drops. In 7 of 11 historical drops, it only took one year for the S&P 500 to recover to its previous all-time high.
- During any time period since 1950, you could have closed your eyes for a decade and re-opened them to find the S&P 500 at a higher price.
- Market drops have become less frequent over time, but the severity of the drops has increased.
- Historically, investors who have been able to avoid selling during drops have been rewarded by the market over the long haul.
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