I'd be interested to see returns used that are more in line with historical recoveries than linear returns. After depressions and corrections the market tends to gather a bit of tension, like a rubber band or a spring, and grow/recovery in larger than average spurts I think you have a good point. I think this should be talked about more. I don't think the situation is as impactful as the spreadsheet makes it out to be. Proof in point- the average recovery time for a correction? 5 months! The spreadsheet has it as 1.36 years
Glad you enjoyed the video. I'm a big believer that human behavior is non-linear, non robotic. The issue I see is that expectations of human behavior are unrealistic, and that making making decisions from a place of comprehension helps people move from making impulsive decisions to decisive ones. Investors that don't understand these concepts make impulsive changes to their portfolio and then exacerbate how long it takes THEIR individual portfolio to recover. It doesn't matter if the market takes 5 months to recover. It matters how long the individual investor takes to recover. My goal is to help investors avoid panic selling when the market is down 12% in 1 month because someone finally illustrated these concepts.
Please give solutions not just problems. Good visuals. I believe average returns you use is low. Avg includes downturn and you just had one; consequently higher is expected.
Hey - thanks for the feedback. Working to shorten my video length (stopping rambling) over time so I can add more substance without boring viewer. Rate of return here was net of inflation, but the principle holds true in any event. Appreciate your comments!
It seemed like when you stated "years to recover using market average return" you may have been simply dividing the loss percentage by the average gain of about 10%. Using Rule of 72 might be a better approximation. Rule of 72 says that 72 divided by rate of return gives the approximate years to double the original amount. So if the rate of return is about 10%, then your investment should double about every 7.2 years. This computation does rely on the "straight line" which is so often used incorrectly, but over long time periods it is the line so as an approximation it works. Using it in planning starts to break down when applied to the stock market, especially as the time gets short. In the 1990s I was getting great returns. I was thinking I might be able to retire before two more doublings - before 2010. It was going to be great! Then 2000-2002 and I lost over 50% in the tech crash. Hold on... That's not good! Down 50% means I need 100% to get back! Using simple division at 10% per year says I need 10 years to get 100%. But it isn't that bad. Rule of 72 says I need 7.2 years. Still ugly... And if the market crashed again? For me in 2001 I figured it was going to take one doubling to get back to where I was, then there would be another possibly two doublings still to go. My horizon went from under 9 years at that point to over 20 years. Yikes! I decided that aiming for such a fickle target as portfolio total value, when it could drop 50% in a year, wasn't going to work for me. That's when the real research started. And thank goodness I did. The market did crash again in 2007-2009. In 2009 I figured my 401k from the 1990s and 2000s was less than I had contributed. But I was positive, thanks to the match. Also I had started investing more outside the 401k, outside the normal "90% in stock and 10% in bonds for someone your age" and those did not go down nearly as much.
You are correct. I used a straight line rate of return assumption for the exercise - there is only so much detail I can go into in a 12 minute or less video :\. Your notes are all accurate and I appreciate you adding this level of detail to the video!
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I'd be interested to see returns used that are more in line with historical recoveries than linear returns. After depressions and corrections the market tends to gather a bit of tension, like a rubber band or a spring, and grow/recovery in larger than average spurts
I think you have a good point. I think this should be talked about more. I don't think the situation is as impactful as the spreadsheet makes it out to be. Proof in point- the average recovery time for a correction? 5 months! The spreadsheet has it as 1.36 years
Glad you enjoyed the video.
I'm a big believer that human behavior is non-linear, non robotic. The issue I see is that expectations of human behavior are unrealistic, and that making making decisions from a place of comprehension helps people move from making impulsive decisions to decisive ones.
Investors that don't understand these concepts make impulsive changes to their portfolio and then exacerbate how long it takes THEIR individual portfolio to recover. It doesn't matter if the market takes 5 months to recover. It matters how long the individual investor takes to recover. My goal is to help investors avoid panic selling when the market is down 12% in 1 month because someone finally illustrated these concepts.
What you described is measured by the Ulcer Index. The Ulcer Performance Index or Martin Ratio is my favorite way to evaluate portfolios.
Please give solutions not just problems. Good visuals. I believe average returns you use is low. Avg includes downturn and you just had one; consequently higher is expected.
Hey - thanks for the feedback. Working to shorten my video length (stopping rambling) over time so I can add more substance without boring viewer.
Rate of return here was net of inflation, but the principle holds true in any event.
Appreciate your comments!
This is what keeps me up at night.
😎
It seemed like when you stated "years to recover using market average return" you may have been simply dividing the loss percentage by the average gain of about 10%. Using Rule of 72 might be a better approximation.
Rule of 72 says that 72 divided by rate of return gives the approximate years to double the original amount. So if the rate of return is about 10%, then your investment should double about every 7.2 years. This computation does rely on the "straight line" which is so often used incorrectly, but over long time periods it is the line so as an approximation it works.
Using it in planning starts to break down when applied to the stock market, especially as the time gets short. In the 1990s I was getting great returns. I was thinking I might be able to retire before two more doublings - before 2010. It was going to be great! Then 2000-2002 and I lost over 50% in the tech crash. Hold on... That's not good! Down 50% means I need 100% to get back!
Using simple division at 10% per year says I need 10 years to get 100%. But it isn't that bad. Rule of 72 says I need 7.2 years. Still ugly... And if the market crashed again?
For me in 2001 I figured it was going to take one doubling to get back to where I was, then there would be another possibly two doublings still to go. My horizon went from under 9 years at that point to over 20 years. Yikes! I decided that aiming for such a fickle target as portfolio total value, when it could drop 50% in a year, wasn't going to work for me. That's when the real research started. And thank goodness I did. The market did crash again in 2007-2009. In 2009 I figured my 401k from the 1990s and 2000s was less than I had contributed. But I was positive, thanks to the match. Also I had started investing more outside the 401k, outside the normal "90% in stock and 10% in bonds for someone your age" and those did not go down nearly as much.
You are correct. I used a straight line rate of return assumption for the exercise - there is only so much detail I can go into in a 12 minute or less video :\.
Your notes are all accurate and I appreciate you adding this level of detail to the video!
Show us your secret sauce. Give a sample portfolio.
I'll be showing two in my third asset allocation video this coming week.
You can also schedule a call with us and I'd be happy to review one.