Stock Market Losses

In a comment to May 7’s post, David asked for some clarification. May 7’s post was about the frequency with which stocks and bonds have exhibited real (i.e., inflation-adjusted) losses over different time periods. It was noted that since 1926, the longest period it has taken stocks to recover their purchasing power after a loss was 19 years. Yes, unfortunately, that was a 19-year stretch; not 19 months. And yes, that means, had you been investing then, you might not have lived long enough to see your investments recover.

Let’s put that observation in perspective (especially since we’ve just been through a major down market in late 2008 and early 2009).

• 19 years is the worst so far. The one we’ve just been through might be even worse yet. History is just history; not a predictor of the future.
• If you’re focusing on worst case, bonds have exhibited even worse results. We have gone through a period where it has taken bonds 52 years to recover their purchasing power. There is no shelter from the storm.
• Take heart! Both stocks and bonds have been winners more often than losers. How much more often? It depends on the length of time you’re looking at, as shown in the graph in May 7’s post. In investing, time is your best friend.
• That particular measure—frequency of a real loss—is just one small aspect of risk and reward. It says nothing about how bad your loss might be. Nor does it say anything about the reward side: How large might you expect your gain to be.

Investment risk and reward is too multi-dimensional to capture in a single measurement. Take a look at March 16’s post for a refresher.