Market Drop Math
The S&P 500 has a historical annualized return of close to 10%*. That means your money doubles every seven years or so. The cost for that 10% long-term average return is an annual intrayear decline of about 15% and a 35% decline every fourth or fifth year. Let’s call that 35% drop a bad year.
Now let’s do the same in dollar terms.
Start with $100,000,
Just over seven years later it’s worth $200,000,
Just over seven years later it’s worth $400,000,
Then $800,000,
Then $1,600,000.
In growth terms, using dollars is wonderful: $100,000 grew into $1,600,000 in 30 years.
But in market drop terms, using dollars is destructive
In the first year, the intrayear decline meant a $15,000 drop.
In the 30th year, the intrayear decline meant a $240,000 drop.
A bad year in the first year meant a $35,000 drop.
A bad year in the 30th year meant a $560,000 drop.
Focus on percentages when evaluating portfolio performance. Measuring in dollars will only hurt you.
* Past performance is no guarantee of future results. I use the S&P 500 for illustrative purposes only.