Historically, what is the recovery time for a market "correction"?

[Yarnstormer]

I see many members keep cash, bonds, cds etc in case of a sharp drop in the markets. The length of time that folks seem to feel they need to account for varies.

Can anyone tell me what the recovery time for market drops have been in the past? A year? 3? 10?

I realize this might vary based on portfolio but what's a good educated estimate?

 

[REWahoo]

This chart should give you some historical perspective on recovery time:

 

[audreyh1]

I've heard the number 7 thrown around as the prudent number to use for planning to get through a slow market recovery. Obviously many have been shorter than that, but if you take inflation into account they will lengthen.

REWahoo's chart lists the duration of recessions, not the recovery time from market drops.

Anyway, you don't want to plan for the average ones, but the longer ones.

 

[target2019]

This article states that the recovery from a correction (-10%) is relatively short--mean time of 107 days. OTH, recovery from bear (-20%) is much longer--mean time of 684 days.
https://blog.wealthfront.com/no-need-to-fear-market-corrections/

Two quite different animals, correction and bear.

 

[43210]

Nikkei still hasn't got back to its 1989 peak.

 

[UnrealizedPotential]

If it is averaged out it takes since 1929 5.2 years to recover from a bear market. Since 1956 it averages out to 2.8 years according to an online search. I don't claim to know but the above sounds reasonable to me.

 

[audreyh1]

I found this

According to the linked article below, the 10 1/2 years from January 1966 until mid-1983 was the longest period during the last century for the U.S. stock market to "retrace a loss" based on the Inflation-Adjusted Total Return Index of the U.S. Stock Market.

But not the linked article. This was quoted in a Bogleheads conversation. https://www.bogleheads.org/forum/viewtopic.php?t=120587

So 10 years would be a conservative figure.

Wait - 1966 to 1983 is way longer than 10 1/2 years

 

[YVRRocketSurgery]

What's the measurement? From peak to decline to peak?

In practical terms, I've read suggestions of keeping a 5 year GIC/CD ladder of living expenses if that's the way you want to go.

+1 re: comment on corrections vs bears
+1 re: Nikkei index comment

 

[YVRRocketSurgery]

Yeah inflation adjusted adds another layer of to it.

 

[Yarnstormer]

This article states that the recovery from a correction (-10%) is relatively short--mean time of 107 days. OTH, recovery from bear (-20%) is much longer--mean time of 684 days.
https://blog.wealthfront.com/no-need-to-fear-market-corrections/

Two quite different animals, correction and bear.

Thanks for all of the replies. I was thinking of a bear market really, not a correction, an event that would necessitate NOT touching the money til it recovered. I don’t think I will ever be able to set aside 10 years of income! But, 2-5 seems reasonable considering it will be a portion of my income stream, not all.

Right now I’m pretty heavily invested in stocks - and thinking it’s time to start shifting to a more balanced allocation over the next 5 years. I just wondered how close to retirement I should be before seriously looking at it.
Right now a bear market would be stressful, but it would not affect my income. 5-10 years from now may be very different.

I think healthcare is going to get so high I’ll have to get a full time job with benefits in a year or two anyway.

It’s funny, My mom was always ALL in equities but she kept a cash buffer and had large ss from my dad’s record. She never touched the principal other than rmds.

 

[43210]

Yeah inflation adjusted adds another layer of to it.

And dividends.

 

[audreyh1]

Here is another comment from the same thread:

Taylor hit the nail on the head. The equity fear mongers don't take into account the effects of reinvestment of dividends. The Great Depression took 7 years to recover all equity losses which were 80% by the way. Our recent collapse of 60% in 2008-9 took only 4.5 years to fully recover. The collapse that started in 1966 was fully recovered in in 6 years but inflation got so high (up to 15%) that the market had to gain hugely in nominal terms to stay even in real terms for the next 4.5 years. In short there is no multi-decade loss situation in US equities such as has occurred in Japan and other nations. We have been fortunate in that regard. I don't think it's wise to be frightened out of investing in US equities because someone shows a chart of inflation adjusted averages of DJI or the S&P 500 that show no real gains over multi-decade intervals. That chart is misleading but popular in the media. There is no multi-decade interval in US history that has not rewarded long term buy and hold investors well. Period.

A big problem with the 1966-1983 period is that the high inflation also hit bonds and even cash hard. So there was "no place to hide"? Maybe rebalancing helped, although FIRECALC fails during this period unless you lower your withdrawal rate enough to get to 100% success. Or you can switch to the %remaining portfolio withdrawal method and survive it (not run out of money), but you'll face around a 50% drop in real income (for 50/50 AA) during the worst of it.

With the FIRECALC models you are drawing on your portfolio, so that obviously draws out any recovery period.

 

[DrRoy]

I don't see that the number would be useful as every time is different. And in any case, No Market Timing!

 

[audreyh1]

Thanks for all of the replies. I was thinking of a bear market really, not a correction, an event that would necessitate NOT touching the money til it recovered. I don’t think I will ever be able to set aside 10 years of income! But, 2-5 seems reasonable considering it will be a portion of my income stream, not all.

Well, if your portfolio has 25 years worth of income needs including expected taxes (4% rule) and you have 40% of the portfolio in fixed income, you have 10 years income "set aside" right there.

Of course if the stock market drops big time you'll use some of that fixed income to buy stocks when rebalancing. I have a rebalance rule of not going below ten years after-tax expenses in fixed income when rebalancing. This may mean I fall a bit short of my equity target when rebalancing but it sure helps me sleep at night! I ran into this situation in Jan of 2009 - probably because I had already rebalanced twice in 2008 (talk about catching a falling knife!). I don't rebalance as often either now.

I think you should study portfolio models like FIRECALC to see portfolio behavior during the worst case scenarios if you really want to understand the issues with surviving big market drops - especially when combined with big inflation spikes.

 

[pn3069]

Yarnstormer - The closer you are to the "consumption" stage of your savings the more conservative your assumptions have to become for everything such as expected market returns, recovery from a bear market, % of stocks in the portfolio, % of high yield instruments (junk bonds) etc.

This aging bull could continue to trek higher but then.. it could falter.

Markets can stay (ir)rational longer than individual investors can stay solvent. This particular sentiment dominates my investment thesis.

Best of luck to all of us,

 

[REWahoo]

REWahoo's chart lists the duration of recessions, not the recovery time from market drops.

My bad. That's what happens when I post in my sleep.

 

[street]

Very interesting information. Thanks

 

[LOL!]

I don’t think I will ever be able to set aside 10 years of income!
[...]
It’s funny, My mom was always ALL in equities but she kept a cash buffer and had large ss from my dad’s record. She never touched the principal other than rmds.

Bond funds produce income and selling them produces more income. So a portfolio with 40% in bond funds has plenty of non-stocks to weather almost all bear markets.

As for your mom, cash is part of the portfolio just like bond funds are, so she was not ALL in equities.

 

[Andre1969]

I don't have my spreadsheets in front of me, so this is just going from memory, but here's an estimate of the rough patches I've experienced...

1) Finished 2000, 2001, and 2002 in the red, for each year, although there were spikes during 2000 and 2001 that pushed me to new highs. I think I hit rock bottom around August or September 2002. Anyway, 2003 was a good recovery year, and I was probably made whole again sometime in 2004.

2) In 2006, I lost about 10% in the course of a month, around May-June. It sticks in my mind because, while 10% isn't a huge deal, by that time I had amassed about $300,000, so losing $30K seemed like a lot. Plus, I had other life-drama going on at the time, which only added to it. Anyway, I think it stayed down for a couple months, then started to rebound, but I was recovered later in the year.

3) During the "Great Recession", I lost a little more than half, from peak to trough. For me, that would be October 2007 to November 2008. Most of the loss was in just three short months...Sept/Oct/Nov '08. I had a pretty big bounce back in December, and into early '09, but then the official bottom hit in March '09. From there, it seemed to go nowhere but up, although I do remember a quick ~10-15% correction in early 2010. But, I'd say I was fully recovered sometime in 2010.

4) In 2011, I lost about 15% in just one month, between July and August. I got a little nervous, thinking it was going to be another market crash, but held tight. By this time, I think I had been up to around $650K which was a new record for me, and was down to $560K in one month. I ended up finishing the year with a slight loss of around $1-2K, which barely registers. I'd guess I was fully recovered from that 15% loss sometime in early 2012.

5) Supposedly, there was a 10% market correction since then, but I think it hit and then corrected so fast that it doesn't show up in any sort of data that only shows month-end to month-end. Late 2014, maybe? I do remember 2014 starting off as a good year, but peaking out over the summer and then sort of fizzing. I made about 5.6% that year.

Anyway, that's the biggest pullbacks I can remember, since I started getting serious about investing in late 1998. There may have been other hiccups here and there, but I guess they sorted themselves out pretty quickly, otherwise I'd remember them.

 

[VanWinkle]

Well, if your portfolio has 25 years worth of income needs including expected taxes (4% rule) and you have 40% of the portfolio in fixed income, you have 10 years income "set aside" right there.

Of course if the stock market drops big time you'll use some of that fixed income to buy stocks when rebalancing. I have a rebalance rule of not going below ten years after-tax expenses in fixed income when rebalancing. This may mean I fall a bit short of my equity target when rebalancing but it sure helps me sleep at night! I ran into this situation in Jan of 2009 - probably because I had already rebalanced twice in 2008 (talk about catching a falling knife!). I don't rebalance as often either now.

I think you should study portfolio models like FIRECALC to see portfolio behavior during the worst case scenarios if you really want to understand the issues with surviving big market drops - especially when combined with big inflation spikes.

I like that rebalancing rule of not going below a certain amount of fixed income during a bear market for stocks. For me, I think 5 years of fixed income would work, but to each his/her own.

VW

 

[audreyh1]

It’s funny, My mom was always ALL in equities but she kept a cash buffer and had large ss from my dad’s record. She never touched the principal other than rmds.

Like LOL! points out your mother was not all in equities since she had a cash buffer. And RMDs are a significant withdrawal amount, starting at 3.65% at age 70, and increasing steadily, exceeding 4% by age 73, 5% by age 79, and 6% by age 83. So saying "She never touched the principal other than rmds" doesn't mean much as clearly she was drawing it down.

 

[ERD50]

I see many members keep cash, bonds, cds etc in case of a sharp drop in the markets. ....

This concern gets way overblown, IMO, as it ignores some very real-life numbers:

Someone who is considering a large cash/fixed "bucket" is likely fairly conservative, and probably has a WR of ~ 3.5% or lower. And an AA of no greater than 75/25, probably 60/40 or 50/50?

A 60/40 simple portfolio probably kicks off ~ 2.5% in divs, so they only need to draw 1% or less from the portfolio. That's approaching 40 years of withdraws before they need to touch stocks. Not a full 40 years, as the WD will increase with inflation, bond values probably not, and divs might drop in a recession, but you get the idea - a long time. That also assumes you are not rebalancing from fixed to stocks, but again, a long time.

Relax, you don't need a big "bucket", that is what the fixed portion of your AA is for.

-ERD50

 

[kgtest]

Thanks for all of the replies. I was thinking of a bear market really, not a correction, an event that would necessitate NOT touching the money til it recovered. I don’t think I will ever be able to set aside 10 years of income! But, 2-5 seems reasonable considering it will be a portion of my income stream, not all.

Plan in a 20% drop the year you retire and see how successful you are. So if you retire with 1mil, instead pretend its 800k. How would you need to adjust? And if you had enough cash on hand for that first couple years of COL the drop wouldn't matter as much as you could protect principle during recovery by drawing off cash.

I presume a lot on this forum would plan around decreasing COL at that time. I think you need to look at longevity, since you cannot take it with you, perhaps a couple year bear market recovery wouldn't be as bad as we think.

 

[Yarnstormer]

What is a good fixed income choice to hold in a taxable non ira account? Feel free to be specific. I’ve been buying total bond funds but still nowhere near enough fixed. I’m thinking of moving my roth and my former employer 401 k to vanguard and putting it all in wellington.

 

[Andre1969]

I don't have my spreadsheets in front of me, so this is just going from memory, but here's an estimate of the rough patches I've experienced...

1) Finished 2000, 2001, and 2002 in the red, for each year, although there were spikes during 2000 and 2001 that pushed me to new highs. I think I hit rock bottom around August or September 2002. Anyway, 2003 was a good recovery year, and I was probably made whole again sometime in 2004.

2) In 2006, I lost about 10% in the course of a month, around May-June. It sticks in my mind because, while 10% isn't a huge deal, by that time I had amassed about $300,000, so losing $30K seemed like a lot. Plus, I had other life-drama going on at the time, which only added to it. Anyway, I think it stayed down for a couple months, then started to rebound, but I was recovered later in the year.

3) During the "Great Recession", I lost a little more than half, from peak to trough. For me, that would be October 2007 to November 2008. Most of the loss was in just three short months...Sept/Oct/Nov '08. I had a pretty big bounce back in December, and into early '09, but then the official bottom hit in March '09. From there, it seemed to go nowhere but up, although I do remember a quick ~10-15% correction in early 2010. But, I'd say I was fully recovered sometime in 2010.

4) In 2011, I lost about 15% in just one month, between July and August. I got a little nervous, thinking it was going to be another market crash, but held tight. By this time, I think I had been up to around $650K which was a new record for me, and was down to $560K in one month. I ended up finishing the year with a slight loss of around $1-2K, which barely registers. I'd guess I was fully recovered from that 15% loss sometime in early 2012.

5) Supposedly, there was a 10% market correction since then, but I think it hit and then corrected so fast that it doesn't show up in any sort of data that only shows month-end to month-end. Late 2014, maybe? I do remember 2014 starting off as a good year, but peaking out over the summer and then sort of fizzing. I made about 5.6% that year.

Anyway, that's the biggest pullbacks I can remember, since I started getting serious about investing in late 1998. There may have been other hiccups here and there, but I guess they sorted themselves out pretty quickly, otherwise I'd remember them.

Edit: Looking at my spreadsheet now, I see another drop, so...

6) From a new peak in May of 2015, things got choppy and then dropped down, to where I was down about 7.5% in September. I was mostly recovered by November, but then it dropped back again in January. I was fully recovered by roughly July of 2016. And while things did get scary again around the election, the bounce-back was almost whiplash-inducing!

Also, looking back on my #5...for some reason that correction being in late 2014 sticks in my mind, but the biggest drama I have there is a new peak in August, a 2.5% drop for September, but then recovering enough that I finished the year with August being the peak.