Podcast Ep. 130: Are Stock Market Declines Normal? What History Tells Us and What ODs Should Do About It

[00:00:00] Evon: Welcome back to the Optometry Money Podcast, where we’re helping ODs all over the country make better and better decisions around their money, their careers, and their practices. I am your host, Evon Mendrin, Certified Financial Planner(TM) practitioner, and owner of Optometry Wealth Advisors an independent financial planning firm just for optometrists nationwide.

[00:00:25] And thank you so much for listening today. Really. Appreciate your time and attention and on today’s episode. I wanna dive into stock market declinesbecause news headlines have been quite exciting lately as we read about government policy, as we read about economic concerns, tariffs, stock market fluctuations.

[00:00:46] All of those things are providing plenty of fodder for all of these publications. Vying for your attention, trying to get you to read, trying to get you to click, trying to get you to watch, and it has been a rocky start to the year so far for the stock portion of your investments.from their February highs through, as recording through March 14th, the US stock market declined roughly 9%.

[00:01:10] It hit, it dipped below 10% for about a day there, and the global stock market dipped about 5%. So yay for diversification as we see those international global stocks help out there. It’s nothing crazy. These, these declines aren’t anything crazy, but it’s been enough to cause many to get nervous, especially after we’ve had a few years of really strong positive returns.

[00:01:35] And where will market prices go from here? Well, I don’t know. You don’t know. The reality is nobody knows these prices will move unpredictably as new information comes in. What we do know is that stock market declines are actually quite common and happen with a surprising amount of regularity. These are things that we are expecting to see as we invest for several decades of our lives.

[00:02:05] These aren’t things that are rare and scary and we should try to be avoiding altogether. These are things that are ex part of the expected experience when we invest in the broad collection of businesses and corporations all over the world. And so I wanna talk through a little bit of historical data to try to provide a wider context around stock market declines, because it’s really easy to only focus on what’s happening today as if it’s a rarity, it’s really easy to get scared about what’s happening right in this moment. So I want to provide a more historical point of context.

[00:02:40] What History Says About US Stock Market Declines

[00:02:40] Evon: And so a, as we look back, and I’m gonna talk about the US stock market specifically E, especially the S&P 500 index. And I wanna talk about the US market, not because I am a fan of only investing in only the United States.

[00:02:55] But because there’s a really good data set going back quite a bit longer than other global indexes. So there’s a lot of data for the US stock market and although the S&P 500 is not the whole US stock market, it is primarily the largest 500 companies or so in the United States, because these companies are so large, it tends to move , pretty close with the US stock market as a whole.

[00:03:19] How Often Do We See Stock Market Declines?

[00:03:19] Evon: So we’ll look at the US market today and the first question I wanna talk about is, how often should we or have we expected stock market declines to come up?

[00:03:30] And we’ve seen declines of 10% or more with consistency over the years, depending on the year you start with. So I’m looking at a period of 1954 through 2023 for the US stock market. We’ve seen a decline of 5% or more about once a year.the average length of those declines was 101 days. So from top to bottom, about 101 days was the average length. We see a decline of 10% or more about once every 30 months or so. So about once every two years.

[00:04:05] The average length for that from top to bottom was about 234 days. We’ve seen a decline of about 15% or more about once every five years, and that those have on average lasted about 345 days, so almost a year from top to bottom on average. The last time we saw something like that was actually 2020. March, 2020, which is, which is actually a really short period.

[00:04:32] That whole decline from top to bottom and back again was just about a month. So that was a really short, major decline. And we see declines of about 20% or more about once every six years. The average length of those from top to bottom was about 370 days.

[00:04:49] And again, the last time we saw that was about March, 2020, so during the Covid years. So we tend to see declines with some regularity, with some consistency over time. If you were, if you are a long-term investor, aiming towards retirement, aiming towards long-term financial independence, you’re gonna be invested for several decades.

[00:05:08] And so it is likely that you’re gonna see more of these types of declines. Over the years throughout your investing experience.

[00:05:17] Average Declines of the US Stock Market Within Each Year

[00:05:17] Evon: And another way to look at that is that if we look back over the last 45 years again at the US stock market, the US stock market has averaged including dividends in annual average return of about 12%. Out of those 45 years, the majority – so 35 of them – ended with positive returns. So this is 1979 through 2024. However, within each year there was an average decline of 14%. So think about that. To achieve those long-term average returns you needed to have put up with, with a decline within each year on average of about 14%, even if that year ended positive.

[00:06:06] So a double digit decline within a year would be considered average. Typical. Of course, there’s a wide range of ups and downs to get the average numbers. We, we never experienced the actual average. We are experienced the up, ups and downs around the average, but. But if we sort of smooth that out, that’s kind of the typical experience is that yes, in order to get that average long-term annual return, we have to put up with that kind of nonsense.

[00:06:34] And that’s sort of the expectation. So, again, declines are a, a normal part of that investing experience.

[00:06:40] Stock Market Returns After Declines Have Historically Been Positive

[00:06:40] Evon: and, and when we think about after the decline, we see that , our expected returns are, are positive after declines. We’ve seen that historically average returns, post declines have been largely positive. And so, and which is important to think about because the, the temptation is, is to, the temptation we feel is to take action.

[00:07:00] It’s to sell. When there are declines, it’s to try to time the ups and downs and get out and, and flee to safety. But selling as we’re experiencing those declines may be one of the single worst decisions we can make at the worst time. And, and what we see in what, what we, what we would expect is that on average returns, have historically been positive after stock decline.

[00:07:23] So if we look back again historically, we’re going back further now from 1926 through 2024, and if we look at the declines of 10% or more, what we see is that on average one year later, the return is 11.7%.

[00:07:40] That’s the average return one year later, after those declines, the average return three years after those declines was 10.3%. And then if we look five years after those declines, the average return five years after those declines has been about 9.6%.

[00:07:58] And so while we never know how deep they’ll go or how long the declines will last, we have seen historically that businesses, even through these declines, even through recession. Businesses, corporations will continue to do what they need to do to sell their products and their services and Earn a profit for you, the shareholder.

[00:08:17] And it’s not much different than your Optometry practice. If you own a practice or if you work in a private practice, your practice is going to continue to do what it can, regardless of the situation at hand. To sell your services, to sell your products, your frames, , lenses inventory, and to continue to serve patients, to continue to serve your community, to continue to provide for your team, and to continue to Earn a profit for the owner.

[00:08:42] And there has been quite a range of ups and downs. If we look back historically, we can look at, for example, the Great Depression, which was , about an 80% decline. Which lasted 27 months from top to bottom . That’s almost a two year period and a substantial decline that could not have been fun to live through.

[00:09:01] We can look back at the Covid period on the other end, which is a roughly 34% decline, but it only lasted a month. And then we see periods of times in between. And what I’ll try to add into the show note is a chart showing the. Eventual returns and how long those positive returns periods last after these periods of decline.

[00:09:22] What we’ve seen historically, is that poor returns do tend to be followed by positive returns, and you as long-term investors are able to buy all of these businesses and their future cash flows at lower prices, lower valuations.

[00:09:35] So for those that are regularly investing and adding to your investment accounts, whether it’s through your 401(k)s, your SIMPLE IRAs, or adding to, Roth IRAs or traditional IRAs, maybe you’re adding to taxable brokerage accounts. These are opportunities for you, a long-term investor to continue to buy all of this stuff that you want to own for decades on sale.

[00:09:58] Now that’s different. If you are someone who is an active investor and trying to hand select individual stocks, individual corporations. What we’re talking about here is the broad market. If we’re going to experience the risk, we know there’s short-term risk with investments. If we’re going to experience the risk, we might as well stick around for the eventual hopeful return on the other side.

[00:10:23] Global Stock Markets Have Rewarded Disciplined Investors

[00:10:23] Evon: And what we also see is that markets, if we look broader at the global stock market, markets have rewarded discipline historically. And I’ll, I’ll try to add another chart in the show notes that shows this. But for all of time we’ve seen events that would cause us to decide not to invest sometimes really dramatic, really scary events.

[00:10:42] So we’ve seen two world wars and a great depression. We’ve seen global conflicts. We’ve seen economic shocks. We’ve seen terrorist attacks. 9/11, we’ve seen The Great Recession, which is a near meltdown of the global financial system, and we’ve survived that by the way, we’ve seen a global pandemic. Yet markets have rewarded long-term investors that are patient and that are able to stay the course.

[00:11:09] Of course, history isn’t guaranteed to happen in the future. We’re talking about historical information, right? So the future is always uncertain. We know that that’s the nature of investing. We’re putting our dollars at risk or buying risky assets. So that we can Earn a higher return over long periods of time relative to more conservative assets like cash, CDs, even short term government bonds, things like that.

[00:11:37] So history is not guaranteed to happen into the future, but history is a fantastic way to get reasonable expectations. And so that’s what we’re trying to gauge here. We’re trying to gauge reasonable expectations around how often declines happen, roughly how long they’re expected to last, and what we should do about that.

[00:11:58] Again, that short term risk and uncertainty is the price we pay. The price of admissions, so to speak, for higher long-term returns we expect when investing in the stock market all over the world over more stable investments. As the saying goes, no pain, no premium. If we’re not willing to take on risk, we shouldn’t expect higher returns over cash, for example, over government bonds, things like that, regardless of the circumstances.

[00:12:26] Remember what you’re investing in, you’re investing in among the best corporations all over the world and those best corporations all over the world. We would expect them to continue working, working to sell their products and services and continuing to Earn a profit. And so with that in mind, we, we can kind of get the gist that declines happen on some regularly.

[00:12:47] This isn’t something we should try to avoid. This is a normal part of investing for the long term and. Is this time different? You, you know, you often hear the saying, that the most dangerous word in investing is this. Time is different.

[00:13:01] Well, the reality is this time is different every time’s different. That is the cause of each decline, the cause of economic uncertainty, the causes, causes of recessions are always different. The exact context and details are always different, but what isn’t different is the fact that declines happen, and we’ve seen that with some regularity.

[00:13:25] What isn’t different is that there’s crises, that there’s nervous investors, that there’s stuff happening in the world that cause the profits and cash flows of these businesses to be more uncertain in the short term we’ve seen that declines even very dramatic declines due to really serious world events have happened already.

[00:13:45] We have experienced them looking back through history . And so while they’re not always fun to go through. They aren’t something we should be fearful of. They’re something that we should build into our planning. We should build into our expectations. And these are things that we should weather.

[00:14:00] What Actions Should Optometrists Take During Stock Market Declines?

[00:14:00] Evon: And so what are some actions that you, optometrist should take during declines? What, what are some things we should do? there are some reasonable things that we should do.

[00:14:08] Don’t Give In to the Temptation To Time Market Swings

[00:14:08] Evon: Number one. Don’t, I’m gonna start with, they don’t, don’t give into the temptation to time the swings in markets.

[00:14:15] Because market swings each day, each month, even year, are incredibly unpredictable. There is no expectation that we will ever make the right decisions to sell and then to buy in again at exactly the right time, you have to time those two separate decisions perfectly. And there’s that temptation to say, okay, I’m gonna sell out now.

[00:14:36] And get back in at the bottom, or I’m gonna sell out now and I’m gonna get back in when things settle down, quote unquote, whatever, whatever that really means. But, I think the Covid example is a really good example to look back at. It’s something that recently we’ve all sort of experienced for the most part.

[00:14:51] and, and what’s interesting is that the covid decline was roughly 34% for the US stock market, and it lasted about a month. It happened quickly, very quickly, and then ended far more quickly than most of the other periods we’ve seen before. I. The daily ups and downs were a sight to behold. I actually remember, I personally, as a professional, I don’t watch the market each and every day.

[00:15:15] It doesn’t mean anything to me. The daily ups and downs, there’s nothing actionable about that. But during Covid, I remember downloading Yahoo Finance and some of these other apps. Just so I can watch what clients were experiencing, I wanted to feel the daily alerts and the ups and downs that we were, we were going through.

[00:15:35] And my goodness, it was a sight to behold. So for example,

[00:15:39] if we look back at March, 2020, here are the, here are some consecutive trading days, one after another March 11th, negative five. Decline. March 12th, negative 10% decline. This is a daily drop, right? So negative 5% drop followed immediately by a negative 10% drop. Then we have a 9% increase, so 9% positive day.

[00:16:03] Then we have a 12% drop, then a 6% positive day, then a 6% decline. These are one days after another. From March 12th, we saw a 10% drop in one day. That was immediately followed by a 9% positive day. That was the, that was tied for the highest daily return of that whole period, and that was immediately followed by the largest 12% decline, the largest daily decline during that whole period.

[00:16:31] Stock market swings day-to-day can play with our brains as we’re experiencing them, and there’s no conceivable chance of timing the right time to sell and the right time to buy while also having the mental conviction, the mental fortitude to actually follow through on it when things are moving like that.

[00:16:48] And there’s a pretty substantial cost to not being invested and missing out on just a few of the best days. of returns and I’ll, I’ll add another chart, or at least I’ll link to another chart in the show notes that talks about, you look at the S&P 500 returns for a whole period, but how those returns drop.

[00:17:08] If you miss the best one day and the best five days and the best 15 days and the best 25 days, the more days you start missing out on, because you miss time those specific days, the more and more your returns actually start to look like treasury bills. Short term government debt. And so there is a real, so there’s a, there’s a pretty substantial cost to our own behavior to, to miss time to trying to take action and making the wrong decisions.

[00:17:39] And unfortunately, personally I’ve seen firsthand when people sell and never actually reinvest the dollars even years later, always looking for that opportunity and then realizing they missed the opportunity. So then they continue to look for the next opportunity and so on and so forth. And we can only look back at the dollars lost while sitting in cash or, or not being invested.

[00:18:00] So we cannot give in that temptation to, to try to take action and time these swings, these swings will play tricks on our brain. And so very often the best course of action is to simply stay invested.

[00:18:13] Remember Your TIme Horizon and Have an Appropriate Mix of Stocks and Bonds

[00:18:13] Evon: The next thing we should do is remember our time horizon and then review that you have the appropriate mix of stocks, global stocks and cash or bonds and other assets that make sense for your financial goal. Remember the goal that you’re gonna be investing toward, and how long are you going to be invested before you actually need the money? Because as we look back again, historically when you look at really short term periods of time, like a month or a year.

[00:18:42] There is a pretty wide range of outcomes, both positive and negative, and it’s really unpredictable where returns are gonna go over a very short period of time. But as you lengthen a time horizon, so as, as you look at five year periods of time, 10 year periods of time, 15 year periods of time, and beyond 20 or 30 year periods of time, what you start to see is that returns become more and more reliably positive and to a certain point as you go far enough.

[00:19:09] Even though there aren’t substantial, there isn’t a substantial data set around 20 year or 30 year periods. What you start to go like 15 years and beyond, what you start to see is that returns are primarily positive. Looking back again, depending on the, the time horizon you’re looking at. But going back, for example, to the seventies.

[00:19:30] Through 2024, there were no negative periods of time that were 20 years or longer. And so the longer your time horizon, the more time you have to go through those declines and through the eventual, we hope will be the recovery on the other side. The longer your time horizon, the more you’re able to lean on that stock side of the mix rather than the bond side of the mix.

[00:19:51] And so now is a really good opportunity if you’re going through, times that are making you uncomfortable. It’s a good opportunity to sort of. Check yourself to say, okay, how do I, you know, what really is my risk tolerance? What really is my time horizon? How much investment risk can I realistically take financially, and do I have the appropriate mix of stocks versus bond versus bonds that’s appropriate for what your family’s investing toward? A thoughtful mix of stocks and bonds is going to be really helpful to weather these declines, weather these storms, regardless of what stage of, of your career you’re at, whether you are about to retire in retirement, or whether you are continuing to invest and build assets, that thoughtful mix of stocks and bonds is really important.

[00:20:37] Rebalancing Your Investments

[00:20:37] Evon: The next thing we can do is rebalancing, right? when I talk with clients, we go through this big conversation about education and eventually we land at a mix of stocks and bonds that is appropriate for the situation. And so we’re targeting, firstly, we’re targeting certain percentage of, of investments towards certain categories, stocks versus bonds, for example, if there’s bonds in the mix or US stocks versus international stocks or large stocks versus small value versus not . And so we we’re targeting certain characteristics or certain categories and certain percentages. And so what we’re balancing is is that. We’re trimming the categories, our investments that are far higher than we’re targeting, and we’re adding those dollars back to categories that are too low.

[00:21:22] And so that’s not something you need to do every day, but you might wanna look at it at a certain part of the year, for example, whether it’s quarterly or annually, or you might wanna look at it as, as I do, as a certain drift away from your target. So if you are, so, if certain categories are, for example, 15 or 20% higher than your target.

[00:21:42] Well, that might be a, a trigger to rebalance. And so what this is, is it’s kind of a systematic way of selling high and buying low. On a set system without any emotion. It, it’s just, there’s particular trigger points that tell you to do that. And for many of you, your ongoing deposits to 401(k)s, your ongoing deposits to other accounts are already doing this.

[00:22:02] They’re, they’re already filling in the holes each and every month, or each and every pay period. But rebalancing is something we look at doing, especially when there’s substantial declines. That might be something we try to do.

[00:22:12] Tax Loss Harvesting in Taxable Investment Accounts

[00:22:12] Evon: number two is tax loss harvesting. And this doesn’t make sense for everybody but.

[00:22:16] When you look at taxable non-retirement accounts, if you’ve recently invested dollars in those funds that you’ve invested in, declined for a capital loss, what you might consider doing is selling those funds and then immediately reinvesting those, those dollars into something else that’s not substantially identical.

[00:22:37] And there are certain rules to avoid what’s called a wash sale. So I’ll put a link into the show notes that talk more about the rules around that. But really all that is, is a tax planning opportunity. It’s not a market timing opportunity. This is a tax planning opportunity. All we’re trying to do is take those capital losses and either use them to offset other capital gains from selling other stuff.

[00:23:00] Or we can use up to $3,000 of the capital losses against the rest of your income like wages or business profit. And if there’s any additional capital losses, those extra losses can be, can be forward, carried forward into future tax years. And so that might be a tax planning opportunity we’ll look at.

[00:23:19] Roth Conversions During Market Declines

[00:23:19] Evon: The next thing we might think about is Roth conversions. And so in years that you already know, it’s going to make sense from a tax standpoint to do Roth conversions. A decline is a really great time to do them. And the reason that is, is because you’re already planning to convert a certain amount of dollars.

[00:23:36] Well, when prices decline, you’re able to convert the same amount of dollars. But more shares, more shares of mutual funds and more shares of ETFs. And that means more shares of your investments are now growing tax free in the Roth account. So a little fun timing, opportunity there if you already know from a tax planning opportunity Roth conversions makes sense.what else should you consider? Well. After those perfectly reasonable actions to take, looking at your time horizon and reviewing and reviewing your appropriate mix of stocks and bonds,considering rebalancing, considering where it makes sense, tax loss, harvesting, considering Roth conversions,

[00:24:18] Stay Invested, Do Some Variation of Nothing

[00:24:18] Evon: after you take some of those reasonable actions, the next best thing to do is to do nothing. Very often. The best action is simply to do nothing and stay invested based on the long-term investment plan you put together. Go for a walk, have a cup of coffee, turn the TV off, turn your phone on airplane mode.

[00:24:37] Go talk with friends and family and just enjoy life. Focus primarily on the things that are directly within your control. That is improving your skills as an optometrist, as a practitioner, and improving your practice. Those are the things that are within your control and that are gonna have the biggest benefit on your income potential, your cash flow, and your ability to reinvest those dollars into other assets.

[00:25:03] And so focus on those things you have the most control over. Otherwise, please do not look at this stuff every single day. It is very likely not going to benefit you to doing that. It’s very likely to simply add a more stress to your life and look at these things with a wider perspective, with a longer perspective, especially a perspective that matches your time horizon. We’re talking from the perspective of a long-term investor, primarily aiming towards financial independence, long-term retirement. If you’re planning to invest for a goal that’s next year or in a couple years from now, well that’s a different conversation.

[00:25:40] That’s really where that appropriate mix of stocks, bonds, and cash and other things is really important. You wanna match your investment mix to your time horizon. And so, hopefully this is helpful. Again, we, we see a lot of these scary headlines. I, I try to provide a, a longer term perspective, more context historical data.

[00:26:00] I think looking through that is helpful, even if it doesn’t make it less uncomfortable. At least it helps you to, to get educated around how often these things happen. And, and what that really means for you. And if you have any questions, please reach out. You can reach out to,to podcast@optometrywealth.Com.

[00:26:17] If you’d like to talk about how to improve your own investments, what these declines mean for you, and your investment goals, and your cashflow and your retirement planning, reach out to me. There are so many opportunities to improve investments. You know, in a, in a lot of ways investing is solved because you can very easily invest so broadly, so inexpensively and, and with very little funds, things can be simple.

[00:26:43] But, but there are still plenty of opportunities to improve our investments, and I’ve seen some examples lately where, new clients had way too many accounts and needed badly to consolidate to be able to manage these accounts more, more easily. we’ve seen where there are, where there are, primarily with large financial institution, institutions, whether in each account there are, you know, 10 to 20 different funds.

[00:27:08] All really expensive, actively managed funds where we can simplify and, create a much more cost effective and improved portfolio with a lot less funds. we’ve seen opportunities where taxable investment accounts had really tax inefficient funds.

[00:27:23] a lot of active managed funds that the categories that were in these accounts, the type of funds didn’t match the type of accounts they were in. And so there are a lot of opportunities to. To improve the investments. Please reach out if you have questions. Or if you have other questions you’d like to see on the podcast, would love to see that.

[00:27:41] And if you’d like to learn more, you can check out our weekly Eyes On The Money Newsletter. I’m writing about this, about student loans, about, practice finances and how that impacts your, your, your household cashflow.

[00:27:52] I’m writing about all of these fun topics each and every week. , so if you wanna learn more, if you wanna follow along, you can subscribe at the link in the show notes and we will catch you on the next episode. In the meantime, take care.