The best data is usually a large sample of data when trying to infer patterns or results based on occurrences. Insurance companies use actuaries tables consisting of large data to determine their exposures to a potential risk. As an example, the insurance companies have compiled many years of historical data for a young driver having an accident at specific ages. Their large tables of historical data confirm that younger drivers usually are less cautious as compared to other age groups, and therefore the cost for a young driver is usually higher for premiums.
Below is a table from DIY Financial Advisor, by Gray, Vogel, and Foulke. This table shows their data from 1927 until 2014 and the largest S&P drawdowns and the length of time involved.
This chart encompasses approximately eighty-seven years of data regarding the largest draw downs in the stock market. As you can see the largest draw down was the great depression lasting about three years. The next largest was the great recession lasting a little over a year.
What is so meaningful about this chart is that it provides a large sample of years of activity within the market, and it shows the exposure of downside that occurred over that sampling of time. The biggest fear of investing is loss. Draw downs are not a loss, and this is why a long term perspective is a good tactic. Also, panicking doesn’t help either. The great depression was a long time ago, and they didn’t have the rapid resources of media and technology they have today, so for an investor to see through the dark fog of what was transpiring would have been hard and very emotional. On the other hand the great recession had quick information and technology, so even though the turmoil was emotionally hard to endure information of what was being done to solve the situation most likely shortened the duration and the ability for the recovery to occur. The other aspect of this topic that adds more depth to this is in the same book DIY Financial Advisor by Gray, Vogel, and Foulke the authors comment on statistics that from 1927 until 2013 (an 87 year time period again) that the market had a 72.4 percent chance of being positive. Add this information to the statistical data above and it’s pretty powerful. History doesn’t always repeat itself, and new reasons may occur in the future to create market draw downs, yet when you put the years of history and the statistical information shown here in perspective it can help with your choices