Bubble prices lock-in negative returns for years thereafter

Further to my points in Fun with S&P 500 snakes and ladders, Lance Roberts offered similar evidence yesterday in You should never time the market? and the below chart of  the real S&P 500 total return, over complete secular bull and bear cycles since 1900.

The time noted each cycle (dotted green horizontal lines), is the time it took for markets to recover their losses and return to prior, leverage soaked, secular peaks: 26, 29, 23 years, and the most recent– not yet finished cycle–16 years from 2000-2016. We won’t actually know how many more years full recovery will take in our present cycle, until we have bottomed once more in the next bear market and then counted the years thereafter that it takes to make back the year 2000 price peak.  Who can afford to spend decades just waiting for their capital to make back losses–financially or emotionally? Working to 100 are we?

Lance offers the bottom line: “Markets spend about 95% of their time making up previous losses and the time lost getting there can’t be recovered.”

MOREOVER,  as I have explained, the above chart of total returns over previous secular cycles actually greatly overstates the real life experience of investors, because total return numbers assume no withdrawals are ever made for fees or taxes, pension distributions or ‘living on your dividend income’–no, total return numbers assume that every dividend is fully reinvested in more shares every single quarter, forever.  No lump sums are ever assumed added near tops, and no panicked selling near bottoms.

In short, the above noted decade+ of zero returns are actually a best fantasy-case scenario from present levels.  Buy and holders beware.  Patiently preserving liquidity now, so as to be able to buy income producing assets at the next cyclical bottom clearance sale though? That will finally be ‘investing’ once more.

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