How Often Can I Expect to See Losses?
When account values go down like they did in the first part of this year, it never feels good. Unfortunately, if history is any indicator, investors are going to experience annual losses on their stock portfolios about once every 4 years.
This chart (from this Retirement Researcher article on using buffer assets in retirement to maintain income without being forced to sell at inopportune times) is a good reminder of what you should expect over the course of a 30 or 40 year retirement.
Despite these regular, and often painful, drawdowns, from 1926 through July of 2022, the S&P 500 has experienced average annual returns of 10.11% (had you been reinvesting dividends). And as much as I would love to tell you there is a shortcut, staying fully invested during these temporary market declines has been, and continues to be, the only sure way to capture the entirety of the market’s long-term advance.
As for the question of how much safe money a retiree would need to ride out a drawdown without selling equities, the article cited above notes:
On average, it took a little more than 37 months for the market to drop and then recover to it’s initial level. Though if you exclude the Great Depression, it only took 26.5 months on average. The Tech Crash, which was the next longest period, “only” took 74 months from peak to recovery.
Overall, most downturns are relatively short. 60% of downturns recover in two years or less, and two thirds recovered by the end of year 3.
When it comes to writing about investments, the disclaimers are important. Past performance is not indicative of future returns, my opinions are not necessarily those of TSA Wealth Management and this is not intended to be personalized legal, accounting, or tax advice etc.
For additional disclaimers associated with TSA Wealth Management please visit https://tsawm.com/disclosure or find TSA Wealth Management's Form CRS at https://adviserinfo.sec.gov/firm/summary/323123