7 Facts That Will Free You From the Fear of Stock Market Crashes
7 Facts That Will Free You From a Fear of Stock Market Crashes
The current bull market in stocks is closing in on an astounding 10 years in length, making it the longest bull market run in all of modern history.
Largest Bull Markets
|#1||09’-18’ (Current)||115 months*|
*As of September 2018
Understandably, this makes many people very nervous.
Everyone remembers the mayhem of 2008 – and with stock prices at all-time highs, the fear of a market meltdown is a valid concern for many investors.
How to Become Unshakeable
Today’s infographic is from Tony Robbins, leveraging data and talking points from his #1 Best Selling book Unshakeable: Your Financial Freedom Playbook, which is now available on paperback.
It leans on insights from the world’s top investors – like Ray Dalio and John Bogle – to present seven indisputable facts about market crashes, using clear patterns established over decades of data.
By understanding these seven facts, you’ll be able to prepare for the recurring seasons of the financial market, including winter, and it will help give you an enormous edge over even many sophisticated and experienced investors.
Seven Indisputable Facts
Here are the seven facts that will free you from a fear of stock market crashes:
Fact #1: On average, corrections happen once per year
For more than a century, the market has seen close to one correction (a decline of 10% or more) per year. In other words, corrections are a regular part of financial seasons – and you can expect to see as many corrections as birthdays throughout your life.
The average correction looks something like this:
- 54 days long
- 13.5% market decline
- Occurs once per year
The uncertainty of a correction can prompt people to make big mistakes – but in reality, most corrections are over before you know it. If you hold on tight, it’s likely the storm will pass.
Fact #2: Fewer than 20% of all corrections turn into a bear market
When the stock market starts tumbling, it can be tempting to abandon ship by selling assets and moving into cash. However, doing so could be a big mistake.
You would likely be selling all of your assets at a low, right before the market rebounds!
Why? Fewer than 20% of corrections turn into bear markets. Put another way, 80% of corrections are just short breaks in otherwise intact bull markets – meaning that selling early would make you miss the rest of the upward trend.
Fact #3: Nobody can predict consistently whether the market will rise or fall
The media perpetuates a myth that, if you’re smart enough, you can predict the market’s moves and avoid its downdrafts.
But the reality is: no one can time the market.
During the current nine year bull market, there have been dozens of calls for stock market crashes from even very seasoned investors. None of these calls have come true, and if you’d have listened to these experts, you would have missed the upside.
The only value of stock forecasters is to make fortune-tellers look good.
– Warren Buffett
Fact #4: The market has always risen, despite short-term setbacks
Market drops are a very regular occurrence. For example, the S&P 500 – the main index that tracks the U.S. stock market – has fallen on average 14.2% at least one point each year between 1980-2015.
Like winter, these drops are a part of the market’s seasons. Over this same period of time, despite these temporary drops, the market ended up achieving a positive return 27 of 36 years. That’s 75% of the time!
Fact #5: Historically, bear markets have happened every three to five years
In the 115 year span between 1900-2015, there have been 34 bear markets.
But bear markets don’t last. Over that timeframe, they’ve varied in length from 45 days to 694 days, but on average they lasted about a year.
Fact #6: Bear markets become bull markets
Do you remember how fragile the world seemed in 2008 when banks were collapsing and the stock market was in free fall?
When you pictured the future, did it seem dark and dangerous? Or did it seem like the good times were just around the corner and the party was about to begin?
The fact is, once a bear market ends, the following 12 months can see crucial market gains.
The best opportunities come in times of maximum pessimism.
– John Templeton
Fact #7: The greatest danger is being out of the market
From 1996 through 2015, the S&P 500 returned an average of 8.2% a year.
But if you missed out on the top 10 trading days during that period, your returns dwindled to just 4.5% a year.
It gets worse! If you missed out on the top 20 trading days, your returns were just 2.1%.
And if you missed out on the top 30 trading days? Your returns vanished into thin air, falling all the way to zero!
You can’t win by sitting on the bench. You have to be in the game. To put it another way, fear isn’t rewarded. Courage is.
– Tony Robbins
Just 20 Stocks Have Driven S&P 500 Returns So Far in 2023
From Apple to NVIDIA, megacap stocks are fueling S&P 500 returns. The majority of these firms are also investing heavily in AI.
Just 20 Stocks Have Driven Most of S&P 500 Returns
Just 20 firms—mainly AI-related stocks—are propping up the S&P 500 and driving it into positive territory, signaling growing risk in the market.
The above graphic from Truman Du shows which stocks are making up the vast majority of S&P 500 returns amid AI market euphoria and broader market headwinds.
Big Tech Stock Rally
Tech and AI stocks have soared as ChatGPT became a household name in 2023.
The below table shows data from last month, highlighting that just a small collection of companies drove most of the action on the U.S. benchmark index.
|Company Rank||Name||Contribution to S&P 500 Return||Average Weight|
|7||Alphabet (Class A Shares)||0.34%||1.72%|
|8||Alphabet (Class C Shares)||0.31%||1.53%|
|10||Advanced Micro Devices||0.16%||0.39%|
|Top 20 Companies||7.05%||29.17%|
*Based on the Vanguard S&P 500 ETF as of April 11, 2023. Source: Vanguard S&P500 ETF, Bloomberg.
Microsoft invested $10 billion into OpenAI, the creators of ChatGPT. It has also integrated generative AI into its search engine Bing. This large language model is designed specifically to make search capabilities faster, generate text, and perform other automations.
Also of interest is NVIDIA, which is the most valuable chipmaker in America. It sells $10,000 chips called A100s that allow machine learning models to run. These models perform multiple tasks simultaneously to develop neural networks and train AI systems, including OpenAI’s ChatGPT. Companies that are developing AI-related services, such as chatbots or image generation, may use up to thousands of these chips.
Despite being the world’s most valuable company and a key driver of returns, Apple is an outlier among tech giants with no major projects announced in AI (so far).
Implications of Market Divergence
The problem with the strong gains seen in a few select AI-related stocks is that it clouds wider stock market performance.
Without the AI-led rally, the S&P 500 would be returning -1.4%. as of May 17, 2023.
4. AI is fueling the stock market
A handful of stocks are spearheading the S&P 500's impressive 9% rally this year.
Here’s the kicker: if you excluded AI stocks, the S&P 500 would be down over 1% (according to Societe Generale). pic.twitter.com/SME1mJVpoW
— Rowan Cheung (@rowancheung) May 22, 2023
This form of steep divergence, known as market breadth, often signals higher risk in the market.
When more companies experience positive returns it is less risky than a small handful seeing the majority of the gains. Today market breadth is very narrow, and these companies make up over 29% of the entire index’s market capitalization.
How long AI-related firms mask the broader performance of the S&P 500 remains to be seen. A growing number of market pressures, from higher interest rates to banking uncertainty could add further challenges.
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