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Stock market declines can result in panic selling

Stock market declines can result in panic selling

June 5, 2020

In 11 out of the last 15 recessions, the value of the US stock market fully recovered in two years. In all 15 recessions the market eventually recovered every time, writes Peter Watson.

Losing money in the stock market can drive some investors away from owning stocks altogether.

There are two problems. First, you see the value of your portfolio evaporate. Second, the news during a poor economic period is mostly negative and there seems to be little hope of a recovery.

The reality of investing is when the stock market loses money, those losses are eventually recovered.

That is not a prediction of the future. It is what has happened every time in the past.

There have been 15 recessions in the US during the last century. Stock returns were positive after two years of the start of the recession 11 times, according to the Fama/French Total US Market Research Index.

Two years after the start of these recessions, the average annualized return was 7.8 per cent.

Assume you had $10,000 at the beginning of a recession, that’s when the media doom and gloom accelerate.

Many people that suffer a loss will give up on stocks, take their loss and park their money in cash.

Two years after the recession started, the market was up to $11,937. That is for those that accepted normal market volatility and stayed invested.

Will investors be concerned with volatility and possibly panic and sell? A short answer. Yes.

Stock markets are volatile. My prediction unfortunately, is it will happen again the next time we see a recession begin.

Peter Watson is registered with Aligned Capital Partners Inc. (ACPI) to provide investment advice. Investment products are provided by ACPI. ACPI is a member of the Investment Industry Regulatory Organization of Canada. The opinions expressed are those of the author and not necessarily those of ACPI. Peter Watson provides wealth management services through Watson Investments