Periods of negative share performance can be frightening, especially when accompanied by bad press. However, when watching prices fall, it can be easy to forget how frequently these drops occur. It can also be easy to ignore the lack of relationship between past performance and future returns.

Dimensional recently shared a short piece about downturns, showing how quickly things can turn around. I have included the snippet below regarding the Australian share market.

Do Downturns Lead to Down Years?

Stock market slides over a few days or months may lead investors to anticipate a down year. But a broad Australian market index had positive returns in 16 of the past 20 calendar years, despite some notable dips in many of those years. Even in 2020, when the market declined 36% associated with the coronavirus pandemic, Australian stocks ended the year with gains of 2%.

Volatility is a normal part of investing. Tumbles may be scary, but they shouldn’t be surprising. A long-term focus can help investors keep perspective.

You may be surprised to see 14 of the last 20 years included a drop in share prices of more than 10%. Of these 14 years, shares recovered to deliver a positive performance in 10; only 4 delivered negative returns overall.

The same pattern is inherent in all global stock markets. Periods where prices fall are as much a part of investing as long-term gains. If you can learn to be comfortable with these drops, your investment experience will be a lot less stressful.

Bad quarters don't follow bad quarters

As shown by the chart above, prices can go up and down quite rapidly. There is very little information in these swings that can be used by investors. As the caveat goes, past performance is not indicative of future returns.

The chart below shows the range of quarterly returns from the S&P/NZX 50 Capital Index (Gross) from July 1991 to March 2021. We can see the quarterly returns are typically positive, yet a third are negative, a few very much so.

Looking at only those quarters which follow a quarter with negative returns, we see no pattern suggesting negative performance continues. This is shown in the chart below.

The key takeaways are:

• Periods of negative returns are common and expected

• Turnarounds are often quick; downturns don't mean down years

• Negative past performance tells us little about future returns.

So with this in mind, next time markets make a move downwards, remember how frequently this happens and how soon they could reach new highs.