20% bear market declarations are pretty much useless, but they give journo's and TV types something to sell ads with. Mathematically speaking, the hurt starts at 13% losses.
Losses over 13% require gains of greater than 13% for recovery. The graph below highlights how this works. The blue line approximates the intuitive relationship of losses equaling gains. The red curve is the reality.
Rule #1 in all investment allocation decisions is don't lose money.
Risk management is the name of the game at the asset and portfolio
level. If you are a European and invested in US shares you have lost
50% of your money after the currency conversion. You would need a 100%
return to break even.
The acceleration point for losses requiring greater gains is around a 13% loss. Think of it as inverting the power of compounding returns. Currently the S&P is 26% below it highs. To get back to the previous high point for domestic investors, the S&P 500 needs to gain a little over 35%. The long term +80 year historical average return for equities is around 7-8%, so back break even is in around 4 years based on historical average returns would be 2012-2013.
The ex dividend annual return for the S&P for a dollar based investor since 1998 has been roughly .3%. When one factors in an inflation estimate of 2.5% per year, one ends up with an effective loss of purchasing power of 25% over the last decade. Welcome to the lost decade.Download returncurve.xls
P.S. I am not such a buzzkill in real life, I am just pointing out some facts.
P.P.S . Found this at Wolfram Research. This phenonomon is know as Siegel's Paradox.
