From Ben Carlson at a Wealth of Common Sense:
Traders often make the point that you need a 100% gain to recover from a 50% loss. What’s less often mentioned is that you need a 50% loss to break even on a 100% gain.
So if you’ve been sitting in cash for a number of years waiting to deploy at lower prices, you will need a bone-jarring market crash to make up for the opportunity cost of sitting on the sidelines.
The S&P 500 is now up roughly 500% from the March 9 2009 lows.
To put the next market downturn into perspective: a 10% correction from current levels would take the stock market back to levels last seen this past October. A bear market of 20% would only take us back to levels seen a year ago. Even a 30% bear market — which is more or less the average bear market over the past 70 years or so — would only take the S&P 500 back to late-spring 2017 levels.
While a 40% market crash would only erase about three-and-a-half years of gains.
A 30%-40% market crash would feel awful. But were things really that bad in 2016 or 2017? Weren’t stock market investors feeling pretty good about themselves in those days?
The problem is we anchor to the peak values and become accustomed to those levels.
So while you may have felt pretty good about the value of your portfolio in 2015, 2016, 2017 or 2018, going back to those levels from a 2020 starting point would make most investors sick to their stomachs.
But being a long-term investor means sometimes having to eat excruciating losses which then require enormous rallies to make up for lost ground. It also means participating in enormous rallies with the understanding that markets inevitably give back some of those gains in big chunks.
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