"Extremely rare"? Here's 2008:
The decline, what we call "maximum drawdown," was over 50%. 50% is catastrophic. It means you've got to get 100% real returns just to get back your money -- the money you already had! The money you still would have if you hadn't invested it! With average real returns of the stock market about 4% per year, that could be an awfully long wait before it adds up to 100%.
But it went right back up, you might say! Did it? The drawdown period actually lasted from October 9th, 2007 until March 28th, 2013. Five years and five months of waiting for catastrophic losses to transmorph into gains can feel like an eternity. Just ask the tens of millions of average Americans who couldn't take it and got out at that time, locking in billions in losses. And the max drawdown was actually not 50%, as I said earlier (that was just from January, 2008), but 55% nominal, and over 57% real (check it).
So your 35% number is bologna.
To put this into perspective, if you bought 100 shares of SPY in October 2007, it would have cost $140,000. By March 2009 the value of your investment would have fallen to $61,000. Your account would be underwater by a hefty $79,000. And that's nominal -- in real (inflation-adjusted) terms you lost even more.
But you said such declines are "extremely rare." So the investor shouldn't worry about them, right? Wrong.
There was a double-digit drawdown in 2010: 16%. There was a double-digit drawdown in 2011: 19%. There was a double-digit drawdown in 2012: 10%. (check it) Now 2013 only had a max drawdown of 5.6%, but that still means that in 3 of the last four years there have been very sizable, significant declines. A decline of 16% very dramatically affects your portfolio.
The stock market saw a decline of 89.19% in the drawdown that lasted from 1929 until.... wait for it..... 1954. September 22nd, to be precise. Twen-ty... Five... Years. And again, that's in nominal terms. I don't have time to figure out all these drawdown periods in real terms, but in real terms they all lasted longer.
Next up: 1973-1980, clocking in at a big Negative 45% and lasting 7-1/2 years.
Here's one a little closer to home: March 27, 2000 to May 31, 2007. A loss of 49.15% (nominal), requiring a gain of 96.65% just to break even (nominally). Again, 7 years to recovery. And then a few months later in October, it crashed again. But, but, but, if you got out during that magical four month period, you came out ahead!$$!!1! Yeah. Uh huh. Not with inflation you didn't.
November 29, 1968 to March 6, 1972. Negative 36%.
November 28, 1980 November 3, 1982. Negative 28%.
August 26, 1987 to July 27, 1989. Negative 34%.
And on and on. "Extremely rare"? Give me a break! On what planet are you living?
The Nikkei is in a drawdown and has been since 1989! "As an old associate used to say to our interns upon their starting – I have jeans older than you; and anyone still holding the Nikkei from the 80’s can take solace in the fact they can adjust that saying to tell many young finance professionals – I have Drawdown Durations older than you." (source)
Don't believe Zippy. Here is the truth: Stock markets are volatile. Steep declines are common. They are very common. Deal with it.
Site Information
About Us
- RonPaulForums.com is an independent grassroots outfit not officially connected to Ron Paul but dedicated to his mission. For more information see our Mission Statement.
Connect With Us