My Mantra On Future Stock Market Losses

...One of the hardest parts about the markets is the fact that you know (or should know) eventually they’ll go down. You just never know how much they’ll drop once they start to fall.

By Ben Carlson

For example, I took a look at all of the double digit losses in the S&P 500 from 1928 to 2016 along with a split by different magnitudes:

Breaking stock market losses down even further gives you a sense of how often these losses tend to occur over time. Here are the frequencies in which certain loss thresholds have occurred, on average, in this same time frame:

• 5% losses three times a year.
• 10% losses once a year.
• 15% losses once every two years.
• 20% losses once every three to four years.

Average historical returns never tell the whole story because so few years or cycles ever follow the averages, but these numbers can be instructive. Stock market investors should expect to lose a little money quite often, see a correction occasionally, lose a decent amount every couple years and lose a lot of money on an Olympics-like schedule.

These definitions are by no means scientific, but that’s because it’s difficult to know in advance what will distinguish one type of market drawdown from another. Certainly, there are certain variables that can make some market losses worse than others — economic conditions, valuations, investor preferences, etc. - but really it’s the human element that determines when things will go from a correction to a bear market to a crash and the problem with trying to predict when these things will happen, why they’ll happen or how far they’ll go is because of that human element. Very few people are able to accurately predict the actions of the entire group of market participants because the markets are made up of all sorts of individuals, businesses and organizations who have competing goals, idea, and desires.

I have no idea how I will personally feel tomorrow morning. How will I ever be able to predict how millions of other investors will be feeling one week, month, year or decade from now?

So here’s my mantra on future stock market losses:

Stocks will have periods of poor returns…

…I just don’t know when.

Stocks will have corrections…

…I just don’t know when.

Stocks will go into a bear market…

…I just don’t know when.

Stocks will crash…

…I just don’t know when.

The realization that you know something is eventually going to happen, but you have no control over when or why it will happen can be extremely liberating as an investor. Understanding what you do and don’t know is a huge step in the right direction...