Will the market and your investment ever recover? Do the math.

I read this article Major stock market indexes fall to 1997 levels today and it was deja vu all over again like the dot-com bubble crisis.

For the dot-com bubble, NASDAQ dropped from its highest ~4,700 points on Feb. 2000 to ~1,300 points on Oct. 2002. A drop of 3,400 in 32 months that send the NASDAQ back to May 1997 level. What took 33 months to build (May 1997 to Feb. 2000) took 32 months to destroy. Meanwhile, during that period of 65 months, if you apply 'buy and hold' or 'buy it and forget it' strategy like those so called 'experts' or 'advisors' suggested you to, you would have lost money. What's worst, NASDAQ never recovered to the highest level to this day. It took NASDAQ 5 years (Sep. 2002 to Sep. 2007) just to reach 2,700 and then it went downward again.

Today, DOW ended at around 7,100, about the same level in Apr. 1997. Same scenario here, if you bought anything between Apr. 1997 and now and never sold it, you would have lost money. Just imagine that, 10 years of investing all lost in just 5 months (Dow reached its high at Sep. 2008). In other words, if you put 100% of you saving into money market saving accounts or money market funds in your 401(k)/IRA accounts that paid 3% APR, you would have done better.

OK, so you are young and think you have time to recover, think again. A sharp decline like this will take ages to recover. Here is the math: A x% decline will take a lot more than x% gain to recover.

Let's see an example: Bought a stock at $10, then it lost 40% of its value to $6. What percentage gain will it take to recover? 40% you say. Nope. It will take 250% increase to reach $10 again ($4 * 250% = $10)! So, for the stock market to recover, it will take a LONG time. In best case scenario, the DOW grew at a pretty quick rate of 3 years to double from 1995 to 1998 (4500 points to 9000 points), so it could potentially take 7.5 year (3 years * 250%) for the DOW to recover. How likely is that going to happen, not likely. The same calculation would explain why NASDAQ never reached its high again (to this day).

Personally, I think the 'buy and hold' strategy needs to be re-evaluated. Just how long do you hold? I suggest you ask your broker (or not). Also, I think that the investment landscapes have changed a lot since Peter Lynch and Warrant Buffet era, technologies (e.g. easy access to information) have induced new risks and volatilities to today's market.

How did your portfolio perform between 1997 and now? If you re-balance your portfolio, how did it work out? I would like to know.