What history tells us about market falls, and why panic is the expensive option
Anyone who has invested for a while will know the feeling of opening a statement after a rough few months and seeing a smaller number than they expected. It is natural to wonder whether something has gone wrong, and whether it would be safer to step aside until things settle down. Looking back over a longer stretch of time puts those moments into perspective.
Over the 30 years to 30 June 2026, $10,000 invested in Australian shares grew to around $133,000, an average return of 9.0% a year, while the same amount left in cash grew to around $32,500. That growth did not come in a straight line. Australian shares recorded eight negative years over the period, including two in a row during the Global Financial Crisis. The long-term reward and the short-term falls are part of the same story, and understanding one makes the other much easier to live with.
Falls are a normal part of investing
Most years include at least one noticeable dip in share prices, even years that finish strongly. Between 1995 and 2000, for example, Australian shares went through seven separate pullbacks ranging from 6% to 19%, yet still delivered strong returns in every one of those years. Falls of this size rarely make the evening news for long, and they are quickly forgotten.
Larger falls, usually defined as a drop of 20% or more, are less common but still a regular feature of markets. The most severe on record in Australia were the 1973 to 1974 downturn, when shares fell around 59%, and the Global Financial Crisis, when they fell around 55%. Both were deep enough to shake the confidence of investors at the time, and both were eventually followed by a recovery to new highs.
How long recoveries have taken
The two most recent major falls show how differently recoveries can play out.
| Market fall | How far shares fell | Time to regain the previous high |
|---|---|---|
| COVID-19, February to March 2020 | More than a third, in about a month | About 15 months, by May 2021 |
| Global Financial Crisis, November 2007 to March 2009 | Around 55% | About 6 years with dividends reinvested (September 2013), or nearly 12 years for share prices alone (July 2019) |
The COVID-19 fall was one of the sharpest in history, and also one of the fastest to recover. The Global Financial Crisis tested investors' patience far more. Its recovery also shows how much dividends matter. An investor who kept reinvesting their dividends was back to where they started roughly six years sooner than the headline share price index would suggest.
Why the decade before retirement is different
For someone in their thirties, a large market fall is unpleasant but has decades to work itself out. For someone five to ten years from retirement, timing carries more weight. A major fall shortly before or after you start drawing on your savings can do more lasting damage than the same fall earlier in life, because you may need to sell investments while prices are low to fund your living costs. This is known as sequencing risk.
The more serious risk, though, is often how people react. In a 21-day period in March 2020, as markets fell sharply, 76,042 members of Australian Super alone switched their investment option, according to evidence given to a parliamentary committee later that year. Many of those who moved to more conservative options sold near the low point and were not invested for the rebound that followed. A fall that would have been temporary became a permanent loss.
Preparing before the next fall, not during it
The best time to decide how you will respond to a market fall is while markets are calm. A few practical steps make a considerable difference.
Keeping a cash reserve that covers a couple of years of planned spending means you are not forced to sell growth investments at a bad time to pay the bills. Reviewing your investment mix now, against how long you have until you need the money and how comfortable you are with ups and downs, helps ensure the portfolio you hold is one you can stick with. Spreading your money across different types of investments, such as Australian and international shares, property, bonds and cash, softens the impact when any one of them falls. It also helps to agree with your partner, and with your adviser, what you will and will not do when the headlines turn negative.
For those approaching retirement, two more structured approaches are worth knowing about. The first is often described as a bucket strategy. Your money is divided according to when you expect to need it, with a cash bucket covering the next year or two of spending, a middle bucket of more defensive investments such as bonds for the following few years, and a growth bucket of shares and property for the longer term. Living costs are drawn from the cash bucket, which is topped up from the other buckets when markets are performing well, so growth investments are rarely sold after a fall.
A second option is a lifetime annuity, which converts part of your savings into a guaranteed income for life regardless of what markets do. Using a portion of your savings this way can cover essential expenses with certainty, leaving the rest invested for growth, although it does mean having limited access to the capital held within the annuity. Neither approach suits everyone, and each involves trade-offs that are worth working through carefully.
None of this prevents markets from falling, and there will always be another downturn. History suggests, however, that the investors who come through them best are those who had a plan in place beforehand. A fall you have prepared for is a temporary setback. A decision made in a panic can turn a paper loss into a real one.
If you would like to check whether your investment mix and cash reserves are set up to ride out the next downturn, please get in touch to discuss.
References
Vanguard Investments Australia, 2026 Vanguard Index Chart: invest with perspective, 30 years to 30 June 2026.
AMP, Dr Shane Oliver, Oliver's Insights: share market falls, seven things for investors to keep in mind, 25 January 2022.
Top Foreign Stocks, Bear markets in Australian stocks since 1900, data from Dr Shane Oliver, AMP Capital, November 2018.
The Motley Fool Australia, How did the ASX 200 perform in the GFC?, 13 March 2020.
ABC News, ASX 200 share index hits a record high, finally beating pre-financial crisis levels, 30 July 2019.
ABC News, ASX reaches record closing high, but can it stay there?, 11 May 2021.
Money Management, How spooked super fund members crystallised their losses, 17 September 2020.