<p>We&#8217;re currently in &#8216;correction&#8217; territory with the UK market down 10% from its most recent peak in May 2018. Stock market falls like this can hit investment trusts harder than most, as a lot of funds have some level of gearing and discounts to asset values tend to widen.</p>
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<p>I&#8217;ve recently put some money into the market. Not a lot, but enough to have me rolling my eyes and thinking why didn&#8217;t I sit on the cash for a little bit longer.</p>
<p>It&#8217;s at times like these that I like to refresh myself about a few fundamentals about stock market history. If nothing else, it can stop me from making any rash trades when my emotions are riding high!</p>
<h2>Twice the pain</h2>
<p>You&#8217;ve probably read that price falls hurt more than twice as much as the pleasure you receive from an equivalent price gain. In fact, it&#8217;s been measured at 2.25 times. This phenomenon is known as <a href="https://en.wikipedia.org/wiki/Loss_aversion">loss aversion</a>.</p>
<p>With each market fall of this magnitude I experience, I think they have become a little easier to cope with. That&#8217;s not because they hurt any less, but I&#8217;ve got a little bit better at appreciating that it&#8217;s just the way the stock market works.</p>
<p><a href="https://twitter.com/morganhousel">Morgan Housel</a>, a well-known US commentator, has done some excellent work on the regularity of stock market falls:</p>
<blockquote><p><em>Markets crash all the time. You should, at minimum, expect stocks to fall at least 10% once a year, 20% once every few years, 30% or more once or twice a decade, and 50% or more once or twice during your lifetime. Those who don&#8217;t understand this will eventually learn it the hard way.</em></p></blockquote>
<p style="text-align: left;">I think investors should have that middle sentence committed to memory. It&#8217;s a great reference point for how frequent these sort of falls are.</p>
<p>However, although we know that the market will have these falls on a fairly regular basis, we never know when they will take place.</p>
<p>What&#8217;s more, markets seem to rise slowly but fall quickly. Loss aversion, therefore, dictates that we hardly notice the gradual gains but that falls can be seared into the memory.</p>
<p>The financial press does their best to spook everyone, too. Bad news sells, so they roll out the &#8220;UK stock market loses £.. billion&#8221; headlines.</p>
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<h2 class="usmf-new article-body">How has the UK fared?</h2>
<section class="usmf-new article-body">I&#8217;ve created the following chart which shows how far the UK stock market has fallen from its previous all-time high. It&#8217;s measured on a total return basis, so it includes dividends as well as share price movements.</section>
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<figure id="attachment_758" aria-describedby="caption-attachment-758" style="width: 600px" class="wp-caption alignnone"><a href="http://www.itinvestor.co.uk/wp-content/uploads/2018/10/Drawdown.png"><img class="wp-image-758 size-large" src="http://www.itinvestor.co.uk/wp-content/uploads/2018/10/Drawdown-600x272.png" alt="UK stock market drawdown from the previous peak" width="600" height="272" /></a><figcaption id="caption-attachment-758" class="wp-caption-text"><em>Click to enlarge</em></figcaption></figure>
<p>Now that I think about it, this chart pretty much spans my active investing career. I owned some privatisation shares in the 1980s but basically left them to do their thing up until the mid-1990s.</p>
<p>Over this period, the UK market has been within 5% of its all-time high almost half the time. In other words, the fact the market is near its all-time high shouldn&#8217;t put you off making a long-term investment. Stock markets regularly make new, all-time highs &#8212; it&#8217;s kind of their thing.</p>
<p>At the opposite end, being 20% or more off an all-time high is relatively rare, accounting for just under a sixth of the period I looked at.</p>
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<h2>Reliving the big bears</h2>
<p>I don&#8217;t remember much about the fall in 1994 and 1995. I was just getting started and my portfolio was pretty small at the time.</p>
<p>That sharp spike in 1998 is another matter. It was the Asian crisis/Long-Term Capital Management debacle and I remember that I was working abroad for about a month in a very remote area. I got a copy of the Financial Times at the airport on my way home and got a nasty shock when I checked the share price pages!</p>
<p>The dotcom bust was a biggie. But when you include dividends, it took just five years or so for the market to hit a new all-time high. That was a weird bear market, though. Old economy stocks actually did really well but anything remotely associated with technology got hammered.</p>
<h2>The hardest market of all</h2>
<p>The financial crisis of 2008/2009 was the toughest market I think I&#8217;ve ever faced. Everything fell. And really quickly.</p>
<p>I was writing financial articles throughout this period, struggling to make sense of how it was all playing out. For a few months, it really seemed like the whole financial system could come crashing down.</p>
<p>By the way, if you haven&#8217;t read Alistair Darling&#8217;s <a href="https://www.amazon.co.uk/Back-Brink-1000-Days-Number/dp/0857892819">&#8216;Back From The Brink&#8217;</a> on how we muddled our way through this period then you really should. Don&#8217;t read it late at night as it&#8217;s terrifying in places!</p>
<h2>How have we done since the last crash?</h2>
<p>Since the financial crisis, we&#8217;ve had a number of sizable market falls here in the UK.</p>
<p>We&#8217;ve had three drops between 15% and 20%, in 2010, 2011 and 2016. Then there have been five of around 10%, in 2012, 2013, 2014 and now twice in 2018.</p>
<p>That&#8217;s eight 10%+ drops in the last nine years and that&#8217;s pretty much par for the course.</p>
<h2>So, what happens next?</h2>
<p>As I&#8217;m writing this, the UK stock market is rebounding a little, but I&#8217;ve got no idea where it might head next. Neither does anyone else of course, <a href="https://www.fool.com/investing/general/2016/01/21/why-does-pessimism-sound-so-smart.aspx">no matter how smart</a> they might sound.</p>
<p>Historically, 10% falls seem to turn into 20% falls about half the time. Of the last eight 10% falls, we have had three that have gone on to hit the 20% level or thereabouts. Of course, the last of those eight is still in progress, so only time will tell how it actually plays out.</p>
<p>You could argue that the fact we&#8217;ve had two 45% declines in the last twenty years means that another really big fall right now is unlikely.</p>
<p>Perhaps.</p>
<p>The trouble with stock market data is that we don&#8217;t actually have a great deal of it. Decent records go back about a century or so, although the stuff that&#8217;s readily accessible on the Internet tends to be only two or three decades.</p>
<p>And although we can say what has happened, it&#8217;s only a rough marker post for what to expect going forward.</p>
<h2>If&#8230;</h2>
<p>How you react to falling share prices should be your own decision of course.</p>
<p>If you intend to stay invested for a long time, as I do, then most people would argue that you should stay the course. Selling after a heavy stock market fall and then being too afraid to buy again can really destroy your wealth.</p>
<p>If you&#8217;re hoping to cash in over the next few years then hopefully you&#8217;ve already begun the process of moving into less risky investments. In that case, the effect of any stock market fall should be muted somewhat.</p>
<p>If you find that you&#8217;re rethinking your investing strategy simply because the market has fallen a little, then I think it&#8217;s time to go back to the drawing board. You&#8217;re probably focusing too much on price movements at the expense of the underlying investment.</p>
<p>If you&#8217;re being really sensible, you haven&#8217;t been looking at your portfolio at all this past week and you didn&#8217;t know the market had fallen 10%!</p>
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