The S&P 500 is up 13.1 percent for 2026 as of October 28, according to the Associated Press. A reader might assume such a year was smooth. Historical data suggest otherwise: even strong years usually contain sharp dips, and knowing that in advance is one of the most practical forms of investor preparation.
The Numbers Behind the Pattern
LPL Research's Jeff Buchbinder has analyzed calendar-year returns for the S&P 500 against the worst decline within each year, known as an intra-year drawdown. In a late-2025 piece, he reported that the average intra-year drawdown has been more than 14 percent since 1980. Over the same period, the index has averaged a gain of 10.7 percent per year, and it has finished higher in about 75 percent of calendar years.
Two points stand out. First, a drop of 14 percent from a recent high is typical, not rare. Second, the drop and the gain coexist: in a given year the index can fall sharply at some point and still end in positive territory. LPL's data were current as of November 25, 2025, and the figures are historical averages. They do not predict any coming year. Individual years vary widely, and the future may differ from the past.
What a Drawdown Feels Like in Dollars
Percentages can feel abstract until they are applied to a real account. Consider a hypothetical portfolio worth $100,000 that is fully invested in an S&P 500 index fund. A 14 percent decline would reduce it to about $86,000 on paper, a $14,000 drop, before any recovery. Someone who sells at that point turns the paper loss into a realized one. Someone who holds may or may not see it recover, and the time it takes is uncertain.
That uncertainty is why risk tolerance matters. A saver who says they can handle volatility is making a prediction about their own behavior, and the true test comes in the middle of a selloff.
Why Declines Happen
Markets fall for many reasons, and the cause often looks obvious only afterward. Common triggers include shifts in expectations for interest rates, disappointing earnings, economic data surprises, geopolitical shocks and changes in investor mood. This year offers a live example of the first. The Federal Reserve raised its target range in September and held it at 3.75 to 4 percent on October 28, with two members voting for a hike, according to the FOMC statement. Investors are weighing what comes next, and expectations can change quickly.
Corrections, Bear Markets and Recoveries
Market professionals use informal labels. A decline of 10 percent or more from a recent peak is commonly called a correction, and a decline of 20 percent or more is often called a bear market. Those thresholds are conventions and not official definitions. Corrections happen more often than bear markets, and the speed of recovery varies. Some drops reverse in weeks, while others take years to recoup. Anyone who plans to need cash soon cannot count on a quick recovery.
What Investors Commonly Do About It
There is no way to eliminate market risk, but investors can manage how it affects them.
- Match investments to the time horizon. Money needed within a few years is often kept in lower-risk holdings such as cash equivalents or short-term bonds, while money for goals decades away can generally tolerate more swings. The tradeoff is that safer holdings usually offer lower expected returns, and they have their own risks, including inflation. The September CPI reading was 3.7 percent, according to the Bureau of Labor Statistics.
- Diversify. Spreading money across stocks, bonds and other assets can reduce the damage from any one market's decline, though it cannot prevent losses.
- Keep an emergency fund. Having cash on hand reduces the chance of being forced to sell investments during a downturn.
- Set rules in advance. Some investors write down what they will do in a decline, such as rebalancing on a schedule, so that fear does not drive choices.
- Keep contributing, if the plan allows. Regular contributions buy more shares when prices are lower and fewer when prices are higher. This approach, called dollar-cost averaging, does not guarantee a profit or protect against loss.
What Not to Conclude
Historical patterns can be misread. The fact that the market has risen in most years does not mean the next year will be positive, and the fact that dips have recovered in the past does not promise they will in the future. Averages hide extremes: some drawdowns have been far deeper than 14 percent. A long record also reflects the experience of the U.S. market, which has done well compared with some other countries' markets.
A Better Question Than "When Will It Drop?"
Investors who ask when the next decline will arrive are asking something no one can answer reliably. A more useful question is whether their portfolio can survive a decline of 14 percent, or 25 percent, without forcing a bad decision. If the honest answer is no, the time to adjust is while markets are calm.
This article is for informational and educational purposes only and should not be considered personalized financial, investment, or tax advice.
