The recent 2016 correction in stocks has lead to some beneficial soul-searching about investing.

But a number of more recent pieces help show the bright side of investing by putting the bad news in its proper statistical perspective.

Eric Nelson, a financial advisor who is the lead writer for the blog of Servo Wealth Management, warns readers not to sell their stocks.

“First, realize that stock declines are very common,” he writes.

Referring to a chart of stock history going back to 1926, Nelson points out, in just about every year, the stock market experiences a significant downturn. “Yet the long-term return on stocks has been fantastic despite these periodic setbacks. From 1926 through 2015, the return on the S&P 500 was +10% annually—every $1 invested became $5,386. It was positive 87% of the time over five-year periods, 94% over ten-year periods, and has never experienced a negative twenty-year period (not to say this is impossible, just highly unlikely).”

He adds that steep and speedy declines don’t typically mean much greater losses in the future.

“Instead, significant declines are often followed by sharp subsequent upturns,” adds Nelson. “According to research from Dimensional Fund Advisors (DFA), we’ve seen 28 instances where stocks fell at least 10% on consecutive trading days—reminiscent of the experience since the start of the year. On average, stocks were up over 23% in the following twelve months, almost 9% per year over the following three years, and over 13% over the subsequent five years. While some downturns lead to greater declines in the near term, the long-term evidence is clear, lower prices eventually lead to higher future returns.”

In recent days, some of the handwringing among investors is centered on the fear that the current stock market downturn could be signaling that the U.S. is heading toward a recession driven by a greater-than-expected global slowdown.

So it’s reassuring when Ben Carlson, author of the Wealth of Common Sense blog, writes that history has had many examples of big market sell-offs that don’t result in an economic recession.

To be sure, writes Carlson , most of the largest crashes in stocks have coincided with a recession — 1929-32, 1937-38, 1973-74, 2000-2002 and 2007-2009 come to mind.

But he points out that double-digit losses and even bear markets can certainly occur without a big economic downturn. “This has happened roughly one out of every five years since the late-1930s,” Carlson adds. “If this does turn out to be one of these non-recessionary down markets then we’re more than half way through the average loss scenario (with the standard caveat that markets are never average in real time).”

He makes a great point: “while losses in the stock market are never enjoyable they’re still the best chance most of us have to see large gains in the future. This is the paradox of investing that is so painful and counterintuitive for people to grasp. Lower prices mean higher yields and higher expected future returns when new cash is put to work.”

Cullen Roche, an influential financial blogger, makes the case on his Pragmatic Capitalism blog that the U.S. is not heading for a recession, an economic event that would surely take stocks into bear territory.

Among his arguments why a U.S. recession won’t happen in the coming year: US and European banks are much healthier today than they were in 2007, there hasn’t been a big credit boom in the US and Europe like there was during the housing bubble, and consumer balance sheets are much healthier today than they were in 2007.

He also points out that “even if China is a financial house of cards their financial system isn’t interlinked to the USA and Europe in the same way that the USA and Europe are interlinked.”

Finally, Zachary Karabell, head of global strategy at Envestnet, wrote a piece for Politico that juxtaposes all the doomsaying with the reality of an economy that is chugging along reasonably well.

The facts are that the United States has experience 70 consecutive months of job growth; the headline unemployment rate is at 5 percent, which is half what it was in the worst of 2009 and close to what it was in the boom times of the 1990s,” writes Karabell.
“Economic growth as measured by GDP has been chugging along steadily at between 2% and 2.5%, which is lower than it was for much of the second half of the 20th century, but rather high compared to any other developed economy in the world. And while wages are stagnant, and most incomes other than those of the very affluent are as well, costs of many of life’s essentials from energy and gasoline to communications to clothing and food, are lower.”

Source:  Barron’s

http://www.barrons.com/articles/bright-side-to-stock-rout-1453247783