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Stock Market Crash and Recovery

Well, it's official. 2008 was one of the very worst years the stock market ever had. Take a look:

 

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Now mean reversion suggests that awful years should be followed by decent recoveries, so let's see how well that's worked in the past:

 

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S&P 500 returns (dividends included): Robert Shiller and Yahoo! Finance

 

Sure enough: on average, and with some exceptions, it's paid off to stay the course after a really brutal year. (Note specifically that the market can recover before the economy does.) (Also note that there was significant deflation during the 1930s, so the inflation-adjusted returns for those recoveries are better than the non-adjusted ones. The 1970s and the years right after World War I were the extreme opposite of that, with high inflation.)

Party Like It's 1932

But that still doesn't mean you should start buying stocks on margin. Think about 1931, the Worst Year Ever. It was followed by another bad year (1932, with a smaller loss) before the market finally came back strong in 1933, with an incredible gain of more than fifty percent. So think "stay the course", not "go nuts".

 

Article Contents
Market Abnormality
Significant Outliers
Ups and Downs
Long Term Risk
Momentum & Reversion
Crashes & Recoveries
Retirement Planning
MPT, VaR
Skill vs. Luck
Books & Links

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