Financial Planning Blog

The recent stock market declines are disappointing, to say the least. How long will it take for us to regain what we have lost and to start growing our retirement portfolios again? Of course, no one knows the answer to that question—and beware if they say they do.

You may have heard some discouraging statistics from the bear market that started with the crash of 1929. It is often sited that the U.S. stock market took 25 years to return to its 1929 highs, which only fuels the today’s pervading pessimism. If you are approaching retirement, 25 years seems like a lifetime--and actuarily speaking, it is. If it helps, a closer look at the data says that although it was bad, it was not nearly that bad.

In a recent New York Times article, Mark Hulbert does readers a great service by shedding a bit of light on these dark market statistics. He points out a few things about stock market indexes that obscure what investors really experience. First, the two most popular indices, the Dow Jones Industrial Average (the index cited in the article) and the S&P 500 ignore dividends in calculating the index. Not including dividend understates investor returns significantly. In the 25 years following the 1929 crash, dividends on the S&P 500 averaged between 5% and 6% per year. In fact, during the 1932 market lows they approached 14% for few months. (Although recent dividend rates have been much lower, today the dividend yield on the S&P 500 is over 3%.)

The second major factor to consider is inflation, or in the case of the 1930’s, deflation. Because price levels fell so severely in the early 1930’s, in real purchasing power the stock market decline was not as severe as it looks on the surface. From 1929 to 1936, the prevailing price level dropped over 18%.

The last item to consider is the fact that the Dow or S&P 500, while possibly good representations, are not the entire market. Using broader stock returns data from highly respected Ibbotson Associates, again presents a more positive picture. According to Ibbotson, it took only about 4.5 years for investors to come back from the 1932 market lows and regain the 1929 market peak in real terms (i.e. after inflation and deflation are factored in). In all, it appears it took about 7 years from the 1929 peak for portfolios to return in real terms.

While 7 years, or even 4.5 years, may seem like a long, long time, it sure beats 25 years. And, hopefully your portfolio losses were tempered by a reasonable allocation of safer fixed income assets, so you don’t you don’t have as far to return to peak levels. Whatever your personal situation is, don’t let people depress you even further by citing historical market statistics in a less-than-accurate manner.