US Equity Returns Following a Market Decline

Rick Prime

The stock market was down 20% this year at one point due to rising interest rates, concerns about inflation, and the war in Ukraine. Here at HFG Advisors we are sympathetic to questions and emotions many clients have during this market decline. We do not have a crystal ball into the future. We try to practice what we preach: Invest in an appropriate portfolio based on your financial plan, stay invested for the long term, and don’t make investment decisions based on emotion.

A recent example happened just two years ago when we had the Coronavirus shutdown, as shown by the Global Stock Market below. With this philosophy in hand, we decided to rebalance portfolios during the drawdown, generally purchasing equities from fixed income. At a minimum, we stayed the course. Our clients were rewarded immensely.

Global Stock Market Since 2020

I believe the best thing we can do with your portfolio is to maintain your target allocation and rebalance annually or more often when we deviate from your target. First, this is normal. A stock market correction has happened every two years since 1950. Second, our clients’ portfolios have declined significantly less than the screaming media headlines about the stock market sell-off. This is because our portfolios include high quality short-term to intermediate bonds and bond funds. The actual amount of bonds versus equity in your portfolio will differ based on how conservative or aggressive your selected portfolio strategy.

Timing the market is futile. The best and worst trading days usually happen close together. The following is a chart showing the one, two and five year returns after prior market declines.

History Shows That Stock Gains Can Add Up After Big Declines

It is important for you to benefit from the market recovery, which history has shown is as unexpected and can be as rapid as the decline. The best advice is to follow the historical evidence and maintain or increase your equity allocation during this difficult time. At the same time, we can do something to address your discomfort. When the stock market recovers, contact us if you want a more conservative portfolio for the next downturn, or if you prefer the benefits of more equity exposure.