Vanguard Investments have put together a really useful chart plotting the volatility of the Australian share index since June 1978. On the chart they have highlighted 7 significant share market falls of more than 10% over that period. The chart also tracks the length of the decline and the corresponding time taken to recover from the decline. - Click here to be taken to the chart - Australian Share Market Volatility
The average fall has been 21.2% with the average decline of 8.6 months. The more positive part of the chart shows that the average recovery period has been 15.3 months. Another statistic that is not included on the chart but has been widely reported is the average rebound from market lows over 12 months which has been 34% in Australia. See Vanguard's Robin Bowerman's blog for further commentary - Looking Back.
So where is the current Australian market?
The most recent low was reached on the 5th of August with the ASX200 falling to 4,758.5. The high can be tracked back to the 1st of November when the ASX200 reached 6,851.5. This is a fall of 30.55% over a period of just over 9 months. Comparing this to the past 30 years, this decline is one of the more severe (or has been one of the more severe for those who's glass is half full) - 3rd worst out of the last 8.
What insights can we learn from this data?
If you do not believe in market timing, then this data clearly shows the risk of pulling out of the market after the market has had a significant decline. Especially now after the market has already fallen over 30%. It could go further. The largest decline has been 43.5%. But the possible 12 month rebound, based on averages, would outstrip this further fall.
For those with a very long investment timeframe, the graph shows that the share market has always rebound and kept rising over time and overcome the market declines that are inevitable.
If you do believe in market timing then we would love to hear from you.
Of course, it could all be different this time.