Market Returns

Twenty percent of the years (5) produced losses. Three of those years were in a row (ending in early 2003) and one year, 2008, had a large loss (which began in 2007). Yearly results are artificial cut-offs determined by the Moon. However, the human pain of suffering through a major downdraft has no regard for artificial lunar cut-offs.

The maximum drawdown, shown in the summary line above, captures the drop across the years. It represents the drop from your highest equity to your lowest. For data above, two horrendous drops occurred and both seem to be about the same in percentage loss. The bigger of the two was almost 51%. Are you willing or able to emotionally or financially live through such a loss of equity?

Few can answer this question affirmatively. That is why the risk of an investment must be considered and managed. Maximizing return is not a strategy that we (or most people) should pursue. Maximizing return for some tolerable level of risk is appropriate. Risk and ways to mitigate it will be dealt with in a future article.

A Longer View of Stock Returns

For those interested in a broader look of stock performance, the following chart provides just such a look:

(Click on image to enlarge)

his chart covers more than a century of performance by the Dow Jones Industrial Average. Several points are worth noting:

  • The Dow Jones Industrial Average is hardly a diversified collection of US Stocks. It consists of large industrial stocks only and few of them.
  • Erratic performance (drawdowns) were larger in early periods than later periods. The logarithmic chart above allows this to be easily “eyeballed”. (If you are not familiar with logarithmic charts, search on the term.)
  • The largest drawdown occurred during the Great Depression in the early 1930s (a drawdown in excess of 90%).
  • The apparent “stagnation” from 2000 forward is not unlike that of the period of 1965 to 1983.
  • From 1900 to 2010, the Dow Jones average increased more than 1000%
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