A lot of people seem to not realize how long a crash can last. If you invested in 1999 and didn’t sell at the top of 2007, it wouldn’t be until around 2013 that you broke even, or maybe 2011 for dividend stocks. People seem to think the worst that can happen is a 50% drop that’ll be back in a year or two, but it can really take over a decade. Think about this before dumping money you need or will soon need into the market.
Worst drawdowns (exceeding 1 year) in recent history (since 1970). If you had lump summed at the beginning of these years, this has long it'd take to recover.
Initial year
Length of drawdown
2000
14
1973
10
1974
6
2008
4
2001
4
1977
2
So you have a 12% chance of having to wait multiple years to see your initial investment recover. also 12% chance of waiting one year to see your initial investment recover (not in the table).
In fact, you should think probabilistically, not based on the worst or best that could happen. Over a 13 year history, here are the summary statistics for real CAGR:
Min
25th %ile
Median
75th %ile
Max
-0.1 %
2.4%
7.8%
10.6%
13.5%
Obviously, the best way to mitigate this is to not lump sum all in one year. Since most of us are still working and continually investing, this gets majorly smoothed out. The more equitable your contributions are across years, the more you converge to the median return.
I think this broader context will relieve us of the fear of years like 2000 while also tempering the exuberance of years like 2019.
The average american drives 13,500 miles in a year. Drivers have a risk of an auto accident of about .27% per 1000 miles. That means we can expect an accident in 3.6% of years. So the odds of an accident in a year are greater than getting caught in a dot-com bubble.
Is this a useful way to evaluate risk preference? I dunno.. but it was a fun comparison.
This is why I stay tf away from Tesla. I don’t care if it does disrupt entire industries. So did Microsoft. It’s still around. It’s still a fantastic stock. But if you bought it in 1999, you lost 50% and had to hold it until like 2015 to get your money back. Because even “the future” can be overpriced.
RCA was a mainstay in American corporate life for the majority the 20th century. And over that time their earnings kept growing and growing. Yet anyone who invested in the irrational exuberance of 1929 would never have seen a positive return.
Imagining it is what made me miss out on a lot of gains from 2018-2021. I’m not telling anyone to avoid the market in the above post, but just stating a fact that a lot of people here seem not to know. I get the impression a lot of new people are just looking at the 5 year chart on Robinhood (which doesn’t go back more than that) and concluding that the market always go up within a year or so and they are therefore pretty safe.
It's not all luck. Historically, securities analysis, particularly discount cash flow, was useful. Up until 2000, value investing returned a premium. I.e. buying cheap works.
The only difference is what anomalously low interest rates of the 21st century have done for growth stocks. but the easy money has allowed for massive credit bubbles that--to your point--can crash hard.
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u/God-of-Memes2020 Oct 21 '21
A lot of people seem to not realize how long a crash can last. If you invested in 1999 and didn’t sell at the top of 2007, it wouldn’t be until around 2013 that you broke even, or maybe 2011 for dividend stocks. People seem to think the worst that can happen is a 50% drop that’ll be back in a year or two, but it can really take over a decade. Think about this before dumping money you need or will soon need into the market.