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The experience of stock market crashes going back to 1987 suggests investors are going to need to stay patient while they wait for their portfolios to recover from the latest plunge.

The pandemic-driven plunge in stocks is unique – other modern-day market crashes have been due to events in financial markets or the economy. But looking at those market downturns can still provide some sense of what lies ahead for the sort of investor who holds a balanced portfolio of stocks and bonds.

The U.K.-based firm Asset Risk Consultants (ARC) has taken a look at how a Canadian-dollar “steady growth” investor with 60 to 70 per cent of their assets in stocks would have fared in six market declines – 1987, 2000, 2007, 2015, 2018 and the recent decline caused by the COVID-19 outbreak.

Maximum losses in the 2015 and 2018 declines came in around 10 per cent from peak to trough and were more or less reversed in nine to 12 months. “In retrospect, these were sentiment-driven declines that were reversed as the global economy continued to expand and companies continued to thrive,” ARC said in a recent report.

The 2000 bursting of the tech bubble and the 2007 financial crisis were much worse. In both cases, the economic damage that occurred at the time meant that it took the steady growth portfolio more than three years to reverse its losses.

ARC says the 2020 decline so far resembles 1987 in that it hit hard and happened quickly. But recovery from the 1987 crash was relatively fast. Within two years, losses had been reversed.

Recovery from the 2020 market crash looks like it will take longer than that. “The consensus is that containing COVID-19 will cause considerable economic damage, notwithstanding the support packages being promised by governments,” ARC said in its report. “That suggests that it may take several years for financial markets to recover their previous peaks. We may well be only around 50 days into a 1,000-day drawdown.”

ARC says the worst course of action is to sell and lock in losses unless absolutely necessary. It also said that rebalancing – selling better-performing bonds to buy beaten-down stocks – should allow for a faster recovery than a portfolio left untended.

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