Wanting to Sell with Stocks Down 30%? History Argues Otherwise

The stock market breached the down 30% threshold this past week for just the sixth time during the last 50 years. As the Coronavirus has upended our way of living and shut down large swaths of our economy, the odds of a global recession have increased dramatically. Facing these unprecedented levels of uncertainty, many investors are wondering if now is the time to call it quits and go to cash. As Mark Twain is credited with saying, “History doesn’t repeat itself, but it often rhymes.” So, Luke Nicholas, CFA, CFP®, our Director of Portfolio Management and a Principal at Allegiant Private Advisors, decided to dive in and review the other historical instances of 30% corrections and see what market returns looked like after each of those 30% drawdowns. 

The table below breaks down each of the five most recent 30% stock market corrections and outlines the 1-year, 3-year & 5-year returns for investors who resisted the temptation to sell and stayed invested.

30 Percent Market Corrections Table

As you can see, selling when equities were already down 30% was uniformly a very bad decision if you take a long-term perspective.

30 Percent Drawdown Bar Chart

Stocks were significantly higher five years later in each of the previous five cases. Even over the shorter-term, it historically does not pay to sell at such depressed levels. Four out of five times, stocks were significantly higher both one year and two years after a 30% correction. The only exception being the fallout from the Tech Bubble bursting in the early 2000s, where the decline lasted for a few years. In all fairness, valuations had reached such extremes during the tech bubble, that taking multiple years to unwind is very understandable. 

While this longer-term story is compelling, it does not outline what happened to stocks over shorter time frames. In most cases, stocks did continue to fall after breaching the 30% threshold, and sometimes by a large amount. In 2008 the stock market crashed more than 55% before the recovery took hold. 

This time may very well get worse from here, too. However, history shows that long-term investors are rewarded for staying the course and resisting the urge to sell after such a significant decline.  It’s always ok to feel nervous or worried, but it’s never ok to let those emotions drive your investment decisions.  Please talk to any of us if you feel the need for more information or personal guidance for your portfolio.