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How Long Will It Take to Get Even?
By JLP | January 2, 2009
The total return for the S&P 500 Index for 2008 was -37%!
For simplicity’s sake, say you invested $100 in the S&P 500 Index on December 31, 2007. At the market close on Wednesday, December 31, 2008, your account would be worth $63. Your question: how long will it take my account to get back to $100?
Likely scenario: at least 5 years (and I’m not even talking about inflation)!
Check this out:
To get back to $100 from a beginning balance of $63, would require a return of 58.73%. That’s highly unlikely to happen within a one-year time period. In fact, going back all the way to 1926, we have never had a one-year return greater than 53.99% (happened in 1933).
I put together a graphic to show the required rates of return based on different time horizons to recover from a 37% market drop. Here’s what I found:
Keep in mind that this is assuming we have bottomed out! Regardless, I think it is highly unlikely that we will recover from 2008′s market anything short of 4 to 5 years.
One thing you can do to help recover from 2008 is to dollar-cost-average (DCA) by buying a set dollar amount of stocks over a long period of time. That way you are buying stocks at reduced prices, which lowers your overall cost per share and also lowers the risk of buying at the wrong time since you’re not risking all your capital at the same time.
Bottom line: expect it to take years to recover from 2008.
Topics: Investing | 8 Comments »
January 2nd, 2009 at 3:34 pm
if the decline of the american empire is here to stay, you can expect 5 years or longer.
if not, then i say 3-7 years.
January 2nd, 2009 at 4:22 pm
The same could be said for real estate. A bit sobering indeed!
January 2nd, 2009 at 6:45 pm
DCA is the way to go. I’ve been doing that for several years now. The crash has hurt (in theory…not so much in practice as I have had no immediate need of the money) but calculating the value of my current stock in pre-crash (and eventually recovered) prices makes me happy:-).
January 3rd, 2009 at 12:31 am
I work with a few people who have stopped contributing to their 401k because they are losing money. They do not realize that they are buying more shares at bargain prices. Here in a year or two, their 401(k)s will be worth substantially more b/c of DCA.
January 3rd, 2009 at 1:44 am
People who stop investing in their 401k are extremely shortsidhted and will be the ones asking for government handouts when they retire.
I’m happy to be investing at a low (but hopefully not too much lower) time period. It’s definitely offsetting the high prices of 2007 and early 2008! I am ready to ride this out and enjoy my returns in the future.
January 3rd, 2009 at 4:56 am
DCA is a bit of a myth. Analysis has shown that provided you expect to earn a higher average return in the stock investment than you will have sitting in cash, you should invest immediately, rather than DCA in and keep a large lump of cash in the meantime. DCA will work out better than lump sum investing if the market drops, then recovers, or drops and keeps dropping. But it’s worse if the market rises and then falls, or keeps rising. As the market is expected to rise over the long term (otherwise we wouldn’t invest at all), DCA is overall a poorer strategy for maximising investment returns.
Anyhow, in practice very few people (except those winning a lottery or getting an inheritance) have a lifetime’s worth of savings sitting as cash at age 20 and have to choose between true DCA investing or putting it all into their desired asset allocation in one hit. The reality is that people think that they are dollar cost averaging when they are actually investing 100% of their savings each month via 401K plans or similar.
The only real benefit of DCA is the “sleep well at night” factor. If you have a moderate sized lump of cash to invest, using DCA over a period of months or years will guarantee you don’t buy at the peak and have to watch your investment crash and burn. But, most of the time, this strategy will produce lower returns than investing the entire intended amount at the start of the period.
January 3rd, 2009 at 11:42 am
I’m not sure which dead horse EnoughWealth is beating, or why he is beating it. The reality is that not only do people think that they are dollar cost averaging when they actually invest 100% of their savings each month via 401(k) plans or similar, as he says, but also that they ARE dollar cost averaging.
January 6th, 2009 at 8:05 am
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