For one thing, we can use the results in this study to condition our expectations and understand the risks associated with investing in equities. Since an investment lifetime for most investors will be at least 50 years (say, from age 25 to 75), or about 1/3 of our historical study period, you may gain some idea of what to expect during your investing career. Market declines are a natural, inevitable part of investing in equities. But since those declines are often unpredictable and difficult (or impossible) to forecast, we think that the best way to reap equity market premiums (i.e., the return on equities minus T-bills) is to adopt a strategic approach and continue to invest in equities during market declines.
[1] From January 1871 to December 1925 we used market data from Prof. Robert Shiller on the S&P composite; from February 1926 to December 2015, we used the S&P 500 Index (Source: Bloomberg).
[2] Our research for this study is based on monthly data, not daily returns data, for which the results would be quite different. For instance, when we crunched the daily numbers for 1928 to June 2015, we discovered that 30% declines occurred on average every 4.9 years.
Gregg S. Fisher is chief investment officer of Gerstein Fisher.