I’ve talked to some pretty nervous investors recently…even with this latest uptick they’re not sure if they can ever trust the stock market again. With their fears being totally understandable, I decided to research an historical worst case scenario to help them evaluate the length of time they needed to be in the market to be reasonably assured that they wouldn’t lose money.
This was accomplished by portraying someone who had decided to invest in the stock market just before the onset of the The Great Depression. If we could ascertain how long it took this unfortunate soul to get their money back including the worst market years ever experienced, then it may be helpful to of us who are nervous to get back in the game.
First let’s look at some the characteristics of the Depression era market. Interestingly, in the three years after the initial sell-off, there were five “bear market rallies” where the market rose more than 20%. All of these stock market highs were higher than the previous highs, and the following lows were lower than the previous lows.
So this must have been really frustrating and disorienting. Adding to the disorientation is that an average investor lost 35% of their assets six different times is the same three years. Tragically, the final damage after all was said and done from 1929-1932 was a loss of over 90%!
Looking at this historical worst case, if someone had the great misfortune of buying into the market just before 1929 crash, it took someone about 10 years to get back to where they started. There have also been some great 10 year windows in the last 100 years. For example, there have been three 10 year periods that have produced annual average rate of returns of +18%.
Contrast this with an investor getting in just before 1929 but had only had a 5 year horizon, their average annual return would have been a loss of 16.4% per year!
So for those of us who want to make market decisions based upon the historical worst case, we might want a window of no less than 10 years as a minimum “time in the market” to feel comfortable we have little chance of getting out less than we initially invested.
Hello, I’ve worked with various investors and prospective buyers in the private equity field. Can really testify to this article. Well-written too. I’d like to add in my fair share of the experience if you’ll allow me. Usually, I don’t take my time to do so, so this is considered out of the modus operandi for me. Standard investment advice goes: Unless you really know what you’re doing and I mean information trader knowing you should really go mutual index fund S&P 500 (read the NOVA article by Delos Chang on technical/fundamental analysis). The poster here has a lot of great information and insight but the rest of us mere mortals we’re better off ensuring a surefire return on that $1000 that Grandma gave us instead of throwing it all into junk bonds. Look what happened to Milken. I’ve worked with Morgan Stanley and I’ve talked to a few people in the hedge fund business too – most would agree. If you want more information, I’d say go ahead and read the NOVA Delos Chang article I provided above or A Random Walk Down Wall Street. Both propose the same arguments – hope that convinces you!