You Cannot Recover Time

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This article was authored by:  Lance Roberts

When bear market losses occur, headlines talk in percentages: “The market dropped 20%.” Investors nod. A 20% decline sounds manageable, historical, and expected. However, looking at the markets this way and assuming that bull markets have dwarfed bear markets throughout history creates an illusion of safety. This is why such mainstream and mundane analysis is only used to deter concerns about market downturns and suggest that investors remain fully invested at all times. But, if true, why does every legendary investor have one rule in common: “to buy low and sell high”? The investing greats have all warned about the peril of market drawdowns and the risk to investment capital. Bear market losses, when displayed in percentages, obscure what it takes to recover. Furthermore, it ignores the most critical commodity of all investors: the “time” lost and the destruction of the “compounding effect.” The more profound the loss, the more ground you need to make up, and the longer it takes. Investors think they can ride it out. However, many behavioral studies show this is not the case, and that investors eventually “sell” as the “loss avoidance” kicks in. That is when the real damage is done. Most market commentary glosses over that. It speaks in long-term averages and smooth recoveries, assumes you stay the course and never sell, and that you’re not withdrawing funds. Those assumptions rarely hold up under pressure. Losses hurt more than they appear because recovery isn’t symmetrical. If your portfolio drops 20%, you need a 25% gain to get back to even. Drop 30%, and you need nearly 43%. A 50% loss? That takes a 100% rebound. If an investor bought the index and generated a 700% return on their money, why worry about a 50% correction? A 50% correction does NOT leave you with a 650% gain. A 50% correction subtracts 4000 points, reducing your 700% gain to 300%. From 2007 to 2009, the S&P 500 lost over 56%. To recover that, investors needed more than 113% in gains. The market didn’t break even again until 2013. That’s six years to claw back losses. Most investors didn’t make it. They panicked, went to cash, and missed the recovery. Bear markets don’t just reduce your portfolio value. They rob you of time. Time is also the most valuable resource when investing. You can recover money. You can’t recover time. If your plan is based on compounding returns over 20 or 30 years, even a short disruption can have long-term effects. This effect is worse for those nearing retirement. This is the sequence-of-returns problem. If your first years of retirement coincide with a bear market, your odds of running out of money rise sharply. The order of returns matters far more than average returns. Understanding the real cost of bear markets is the first step. What matters is acting on that knowledge. Limit the downside. Avoiding significant losses matters more than capturing every bit of upside. Limiting losses to 10% instead of 30% requires less time and less risk to recover. Maintain a cash buffer. This prevents you from selling assets at a loss during a downturn. A cash reserve acts as dry powder and protects your long-term investments. Reduce equity exposure when valuations are stretched. Avoid going all-in or all-out. Focus on risk-adjusted outcomes. If you’re near or in retirement, reduce sequence risk. The early years of retirement are fragile. One significant drawdown can break the plan. Respect the cycle. Bear markets will come. They always do. Your job is to survive them without losing the one thing you can’t get back: time.