Buying When the Stock Market is Down 15%

At the worst point of this correction the S&P 500 closed down 18.9%.

That was before the giant 10% gain the next day.

I don’t know if that was the bottom or not but it’s possible we just had another near-bear market (for now):

I don’t know why we’ve had so many close calls over the years but there have been a number of near bears over the years that were a hair from being down 20%.

This got me thinking about stock market outcomes when you’re down 15%.¹ What if you buy the market when it’s down 15% or worse?

I looked back at the end of every month the S&P 500 was in a 15% peak-to-trough drawdown or worse since 1950. Then I looked at the forward 1, 3, 5 and 10 year total returns from there.

The results are pretty good:

The average returns were strong when you bought down 15% in the past.

You can also see the percentage of time stocks were positive in each period. Most of the time stocks were up. There wasn’t a single 10 year period when they were higher.

Of course, averages can mask the outliers.

The worst one year return saw you go down another 26%. The worst 3 year return would have seen you lose 7% in total after buying down 15%. If you would have bought at the end of February 2004 when the stock market was still in a 20% drawdown, five years later you would have been down an additional 29% from there.²

This is the risk part of investing in risk assets. Most of the time things work out. Sometimes they don’t. That’s risk.

Maybe we go much lower from here. It wouldn’t shock me because sometimes that happens in the stock market.

But most of the time buying when the stock market is down double digits tends to work out for long-term investors.

Further Reading:
How Bad Could This Get?

¹As of Monday’s close the S&P 500 was in a 12% drawdown. So we’re close.

²That was the double whammy of the GFC in 2008.