What goes up must come down, a basic law of physics that investors forget when the stock market is crashing. The opposite is most certainly also true, what goes down will come back up. If you have lived through a stock market correction, then you may already know this to be true. Remain steadfast in your investment strategy to put yourself in the best position to capture the recovery.
It is during a market pullback that people forget the rebound will repeatedly exceed the fall. The issue is certainty, if you knew for certain you would get ten dollars in the future for spending five dollars today it is easy to spend the money upfront. The difference in terms of the stock market is there is an element of uncertainty with any investment. Historical analysis proves time and time again that the rebound will exceed the fall. However more often an investor will make an irrational decision driven by fear, leading to panic selling in search of a more certain outcome. As the chart will explain, if you have the patience to wait out a crash, there is evidence to suggest you will be rewarded in the years following.
No one has a perfect understanding of the future and what will happen, but we can use the information illustrated by history and the concepts of the market cycle to assume there is a higher probability of positive outcomes following a market correction. According to the piece published by Dimensional Funds, following a 10%, 20%, and 30% market decline, the following 1 year, 3 year, and 5 year average cumulative returns have tended to be positive. When the market pulls back, the years following tend to have positive cumulative returns.
There are always periods of time that could be outliers to this idea however the data shows the longer the period invested the better the potential for positive returns. Patience is still a long-term drive of investor success. Those who have stayed invested the longest, tend to have the best returns. After a decline, the average cumulative return is by far the greatest after 5 years. As the article points out, each downturn event 10%, 20% and 30% all show over 50% cumulative returns in the subsequent 5-year period. Past performance is not indicative of future returns. Past performance is a representation of how the event played out at one time which can be used to assume the outcome of similar events in the future.