The Mathematics of Recovery
Volatility
Historically, the U.S. stock market has risen slowly over long periods. Declines have been sporadic and much shorter in duration, but occasionally have been quite damaging. Since September 1929, the market has experienced nine declines in excess of 20%, and an additional four declines in excess of 40%. As illustrated by the following table, the damage caused by these serious declines can take years of work to correct.
| Market Decline |
Duration (months) |
Percent Decline |
Time Needed to Break Even (years) |
Retrun Needed to Break Even |
| Sept. '29-June '32 |
33 |
86.7% |
25.2 |
651.9% |
| July '33-Mar. '35 |
20 |
33.9% |
2.3 |
51.3% |
| Mar. '37-Mar. '38 |
12 |
54.5% |
8.8 |
119.8% |
| Nov. '38-Apr. '42 |
41 |
45.8% |
6.4 |
84.5% |
| May '46-Mar. '48 |
22 |
28.1% |
4.1 |
39.1% |
| Aug. '56-Oct. '57 |
14 |
21.6% |
2.1 |
27.5% |
| Dec. '61-June '62 |
6 |
28.0% |
1.8 |
38.9% |
| Feb. '66-Oct. '66 |
8 |
22.2% |
1.4 |
28.5% |
| Nov. '68-May '70 |
18 |
36.1% |
3.3 |
56.5% |
| Jan. '73-Oct. '74 |
21 |
48.2% |
7.6 |
93.0% |
| Nov. '80-Aug. '82 |
21 |
27.1% |
2.1 |
37.2% |
| Aug. '87-Dec. '87 |
4 |
33.5% |
1.9 |
50.4% |
| July '90-Oct. '90 |
3 |
19.9% |
0.6 |
24.8% |
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*Source: Telephone Switch Newsletter
During this 63-year period, a new market decline began on average once every 5.2 years, with an average duration of 17 months. After the market bottomed, omitting the distortion of the 1929 crash, it took an average of 3.5 years and an average return of 54.3% just to return to a break-even position.
Every time buy-and-hold investors endured a market decline, they lost valuable time necessary to effectively compound their money. Buy-and-hold investors spent two-thirds of their time just trying to get back to even. Only one-third of the time were they benefiting from the stock market's ability to make their investment grow. It is this crucial weakness of the buy-and-hold strategy that is uniquely addressed by the Bay Capital investment strategy.
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