Gut-wrenching stock declines are more common than you might think

A recent Morgan Stanley Investment Management report analyzing over 6,500 companies between 1985 and 2024 reveals the median stock experienced an 85% drawdown from peak to trough, highlighting the prevalence of significant declines. While the average stock eventually rose to 340% of its earlier peak, skewed by top performers, the median stock only recovered to 90% of its peak value, with 54% never fully recovering. This underscores the importance of diversification and the temperament required to withstand substantial market fluctuations, as even high-flying stocks like Amazon have experienced massive drawdowns.

Analysis

A recent Morgan Stanley Investment Management report, analyzing over 6,500 companies from 1985 to 2024, reveals that significant stock price declines are far more common than widely perceived. The median stock experienced a substantial drawdown of 85% from its peak to trough, with the average drawdown being 81%, excluding dividends and stocks that went to zero. While the average stock subsequently recovered to 340% of its previous peak, this figure is heavily skewed by a small number of exceptionally successful companies; the median stock only reached 90% of its prior high, and a majority, 54% of stocks, never fully recovered. This aligns with research by Hendrik Bessembinder, indicating that just 2% of U.S. listed companies from 1926 to 2024 generated 90% of the aggregate $79.4 trillion in market value, with top firms like Apple, Microsoft, and Amazon (which itself saw a 95% drop between 1999 and 2001) among them. Even these leading wealth creators experienced an average maximum drawdown of 80.3%, similar to the broader sample. The report notes that while timing market bottoms could yield substantial returns—median total shareholder return one year after bottoming was nearly 300% for surviving stocks—this is notoriously difficult, and only 16% of stocks falling over 95% ever returned to their previous highs. These findings underscore the critical importance of portfolio diversification and the psychological fortitude required to withstand market volatility, echoing Charlie Munger's assertion that investors must be prepared for significant, periodic declines in their holdings.

Key Decisions for Investors

• Investors should prioritize robust portfolio diversification given the high probability and magnitude of individual stock drawdowns, as even market-leading companies are not immune to severe declines.
• Attempting to time market bottoms in individual stocks is exceptionally risky, as the data shows a low probability of full recovery for severely beaten-down stocks, with 54% never regaining their peak value.
• Cultivate a long-term investment horizon and the temperament to withstand significant market volatility, as substantial drawdowns are a common feature of equity investing, and holding through such periods is often necessary to capture potential long-term gains, particularly within a diversified strategy.
• Recognize that wealth creation in the stock market is highly concentrated in a small percentage of companies, reinforcing the need for either astute stock selection processes or broad market index exposure to capture these outsized returns.