On Thursday, February 27th, the S&P 500 and Dow both fell more than 12% from their respective highs earlier in the month. In order to enter into a “correction,” an index must be priced 10% below a previous high. The current decline in the S&P 500 is the quickest decline into correction territory from an all-time high in the index’s history.

Since World War II, there have been 27 such corrections. The average decline is 13.7% and recoveries take an average of four months. The most recent correction occurred between September and December 2018.

Market Corrections Since World War II

A bear market occurs almost half as frequently. In fact, on Christmas Eve of 2018, the S&P briefly entered a bear market, declining more than 20% from its all-time high. Since World War II, there have been 12 bear markets with an average decline of 32.5%—the most recent of which is still fresh on many people’s minds. That occurred between October 2007 and March 2009 when markets dropped 57% and took more than four years to recover. You can see from the chart below that the October 07’ bear market was also the largest decline that we have experienced since World War II.

Bear Markets since World War II

Every portfolio will be affected differently by both market corrections and bear markets. We “stress test” every portfolio to illustrate whether certain economic scenarios would result in positive (green) or negative (red) outcomes. For instance, we see that if US Large Cap Stocks Fall by 15%, all of the model portfolios would suffer declines—but they would all decline by different amounts. We observe that our Model 14 would decline by approximately 13.81% while Model 10 might only decline by 10.73%.

The graph below demonstrates the outcomes that we illustrated for Model 10, Model 12, and Model 14.

Stress Test Results of AssetBuilder Portfolios 10, 12, and 14

Everyone invested in a Model 14 would need to determine if they are willing to “stay the course” if they experience a 13.81% decline. If they are hesitant to accept that risk, then they might be more comfortable in a Model 12 or Model 10 portfolio.

The ability to see some of these potential effects also allows clients to focus on long term goals instead of “breaking news.” This is important because, as markets recover, they typically realize most of their “recovery gains” in the early periods of recovery. In other words, individuals who “wait to get back in” typically miss much of the actual recovery.

Instead of market timing, it is best to speak with an advisor to determine what your risk tolerance is and whether you have the ability to withstand specific market conditions. Constructing the right long-term portfolio for you is our goal.