So far in 2016, global stock markets have been rough on investors. From a previous November 2015 high through a recent low, the S&P 500 entered official “correction” territory, falling just above 10 percent. While unsettling, these are times to cling to the ever-important rules of investing.
Let’s focus here on one of the most basic investment rules: Ignore the news and hang in there for the long-term, as tough as that can be. Over the decades, stocks have delivered solid returns for those who stayed invested.
Academic research published by Dimensional Fund Advisors (DFA) shows that during the period from 1970 through 2014, worldwide stocks returned close to 9 percent, annualized. Yet, that 45-year period also included drops as scary as 41 percent in 2008 and gains as thrilling as 42 percent in 1986.
Further, while no one knows for sure what will happen, studies indicate that market returns following periods of steep decline, more often than not, tend to be rather good. Sharp drops are often followed by sharp rebounds. A recent DFA study looking back as far as 1926 indicates that following stock market declines of 10 percent, the average annualized return for the next year is 12 percent for U.S. stocks and almost 16 percent for international stocks.
Heartening signs of a possible impending bounce-back include extreme doom-and-gloom negativity in the media, along with bullish corporate insider sentiment. An example of media bearishness is what financial writer Michael Brush calls the “magazine-cover indicator.” Brush reminds us that business magazines often put doom-and-gloom on their covers, as The Economist did recently, just before market turn-arounds.