#799 - Every 18 Years On Average Investors Lose Half Of Their Money
Hey everyone. This is Kirk here again from Option Alpha and welcome back to the daily call. Today, we’re going to be talking about why every 18 years on average, investors lose half of their money. As we kind of wrap up 2019 and we start getting towards 2020, a brand-new decade, I think it’s important that we just remind ourselves of just how volatile markets can be moving forward in the future and how good we’ve really had it over the last 13 years as far as volatility, market shocks and black swans are concerned. We really haven’t had any major market movements in the last 13 years for US markets and that is a rare thing. And so, that would lead me to believe that in the future, potentially even the near future, the next couple of years, two years, three years or so, we’re going to have a significant move in the market in one fashion or another. And so, I want to revisit some of the things that we talked about actually in our weekly podcast show number 15 which is a really, really long time ago, we started looking at market drawdowns and crashes and started to build some numbers and some data points, some references around how often and how big market moves actually happen. And the first one is that on average, every 18 years, investors lose half of their money. Now, 18 years is a long time, but a 50% drawdown every 20 years or so is a significant move and in many cases, can set you back considerably towards your financial goals. And so, my goal is to of course, avoid situations like this. This is exactly why we started implementing a more aggressive VIX hedge strategy just in the last couple of months because we’re coming up on 13 years here of no major market volatility and I am more than willing to pay a little bit of money to hedge some of this black swan risk. Now, what’s even more shocking to me is not necessarily the major drawdowns which are every 18 years, but the intermediate drawdowns of 30% and 20%, the typical bear markets if you will. Nine times in our history, we have seen stocks fall 30%. That’s basically once every 10 years. Again, I remind you, we’re coming up on 13 years of this bull market run in US equity markets. Does that mean that it’s going to stop next year? Of course not. It could continue on for another couple of years, but it’s getting long in the tooth and we just typically see a lot of cyclicality at some point in the future. 21 times in the past, we’ve seen at least a 20% drawdown in stocks. That’s once every four years. 41 times, we’ve seen a drawdown of at least 15%. That’s once every two years. Now, to be fair, we actually really had one of these drawdowns back at the end of 2018 which just goes to show you that we continue to have these 10% to 15% drawdowns on a regular basis. The 20%, 30%, 50% are more rare, but they’re not rare enough that we should consider them. And then of course, more than 90 times, we’ve had drawdowns of at least 10% which is correction territory which happens generally once every 11 months. It’s just really important that we keep these numbers in the back of our mind especially as we move forward to 2020 just to keep an eye on the risk for our positions and our portfolio moving forward. Hopefully this helps out. As always, if you guys enjoy this, let me know and until next time, happy trading.