## Bear Markets Matter More Than You Think - Part 2

Bear markets matter and they matter much more than you think. (Read Part 1 Here)

In part-1, we discussed the differences between a “correction” and a “bear market.” But what is often missed by mainstream analysis is the long-term damage done to investor’s financial outcomes.

Now and then, you will see a version of the following chart floating around suggesting that over the long-term, “bear markets” don’t matter.

If you only do a cursory analysis of the chart, such would undoubtedly seem to be the case.

The problem is the analysis is exceptionally deceptive due to how math works.

### It’s The Math

Notice that the chart uses percentage returns. As noted, that is a deceptive take if you don’t examine the issue beyond a cursory glance. Let’s take a look at a quick example.

Let’s assume that an index goes from 1000 to 8000.

• 1000 to 2000 = 100% return
• From 1000 to 3000 = 200% return
• The next 1000 to 4000 = 300% return
• The final 1000 to 8000 = 700% return

No one would argue that a 700% return on their money wasn’t fantastic.

So, why should you worry about a correction when you just gained 700%.  Right?

The problem with using percentages to measure an advance is that there is an unlimited upside. However, you can only lose 100%.

In our example, while our hypothetical investor garnered a 700% return, a 100% loss reverses that gain to zero. Nothing. Zip. Nada.

That is the problem of percentages.

### Valuations & Forward Returns

As noted in Part-1, the other issue investors must account for over the long term is inflation. The first chart above is the inflation-adjusted S&P index. For all examples in this article, I am using Dr. Robert Shiller’s monthly data for consistency.

As we discussed, the three most important factors are drawdowns, inflation, and life expectancy.

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