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moneysense.ca, 15/01/09
When will your portfolio recover?
The New York Times has an interesting “Comeback Calculator” to visualize when a portfolio could return to peak levels. Assume you had a portfolio that was worth $100,000 at the start of 2008 and it is now worth only $70,000. If you didn’t add new money to the portfolio and the returns average 8% in future years, it would take 8 years for the portfolio to recover (in real terms). But, if you keep adding, say $2,000 to the portfolio every year, it will recover to the previous peak in 5 years. Of course, your actual experience is likely to be dramatically different, given that stock market returns are never going to weigh in at 8% year after year.
The Stingy Investor website features a far better calculator that uses actual past returns of various asset classes to compute returns for different asset allocation scenarios.
moneysense.ca, 15/01/09
I’m still putting the same amount into my investments as I was before the drawn-out crash, so by that act alone I know the amount in the funds will recover. Honestly though, I’m not spending a lot of time thinking about the value of investments, and intend to spend the next 5 years paying down mortgage as aggressively as possible while still putting +/- 10% into RRSP. Over the last 6 months and next 12 months, I am building a cash cushion to safeguard against the possibility that either of us loses a job. I am young, hope to have kids soon, and this is the time for me to reduce as much risk as I have control over, instead of chasing returns on a smallish portfolio.
In my situation, I have a hard time justifying investing in equities with consensus views of low returns, when I can take this opportunity to hammer the mortgage at these low interest rates and eliminate principle that may be exposed in future years to stimulus-induced inflationary rates, thus catching me off-guard at the worst time (young kids, reduced household income).
Slightly off topic, but it’s the topic on my mind.
[...] The New York Times has an interesting “Comeback Calculator” to visualize when a portfolio could return to peak levels. Assume you had a portfolio that was worth $100,000 at … Excerpt from:When will your portfolio recover? [...]
Yeah, I don’t know how useful it is to use average returns when you talk about recovering to a previous peak value. The market has a history of dynamic growth, which means peaks and valleys, some of which are steep in either direction. In theory, couldn’t you return to a peak value in a couple of months? Maybe I’m wrong, but I think what they’re talking about here is returning to a peak value averaged over a year; in other words the average value of your porfolio over the year settles out at $100K. But to use an overly simplistic scenario, that could mean it ranges from $200K to $50K.
Ben: Good plan. I’ve always been a huge advocate of paying down the mortgage. It is a good idea to build or increase the cash cushion considering the poor economic conditions we are in.
brad: You’re right. Returns are not going to be smooth and the sequence of returns will matter as well. The Stingy Investor calculator is a lot more valuable allowing us to play around with different asset allocation and see how it performed in the past.
It took Dow Jones 15 years of total returns (25 years of price returns) to recover a 100% equities investment made at its peak in 1929.
Now if you bought SPY @ its peak @155 and you expect it would take 15 years to reach the peak again, you could simply sell long dated covered calls at this strike price. I am seeing Dec 2011 calls trading at $1.57/bid now.. an extra one percent for a 2 years waiting period would help your long term returns, as long as SPY doesn’t go through $155 by Dec 2011.
Certainly my portfolio will recover! and it’ll grow too by the time I use it for retirement – 25 yrs from now, but hopefully 20
Its funny, but since this bottoming process and volatility has been around so long, I no longer fret over these paper losses. I’ve accepted them as reality, but not before months of anger, denial… and that whole string of other emotions people are supposed to go through after a loss. I’m pretty happy about our asset allocation and long-term strategy too.
I’m still expecting a 25-30% drop from current values to the bottom, so I won’t be looking at any comeback calculators at the moment.
Hey Al, where did you get your crystal ball? Can I get one, too? This Magic 8 Ball just isn’t giving me exact numbers.
@ CC – given the economic climate, wouldn’t it be better to be building a large (ie really large) nest egg backup instead of paying down mortgage? I mean if you have a mortgage of $300,000 and turn it into $200,000 but lose your job, wouldn’t you rather have the $100,000 on hand? I understand the long-term interest savings but that doesn’t matter if your house gets foreclosed for not paying your mortgage reguarly?
Hey Temple,
My crystal ball is too fuzzy for exact numbers (it’s hooked up to a bell satellite dish, so what would I expect.) But take a look at pretty much any 10 year chart. Subtract out bubbly looking events and add in a recession.
Like Al, I’m still pessimistic but only because the bad economic news keeps coming and coming. So, my method isn’t as quantitative as Al’s, who is calling the 25% to 30% figure to reach bottom. I don’t necessarily need any “good” economic news to make me more positive for the future, but perhaps more of an absence of bad news.
However, almost all of the investments that I own, I purchased for “yield”. As long as they continue to “yield” cash (meaning as long as they don’t go bankrupt) then I will continue to maintain a positive view of my investment choices. That said, all of my NEW money is going into cash and short-term fixed income until I get my absence of bad news.
Speaking of yielding investments, I really got slaughtered on the Nightmare Before Halloween and I don’t think my investments will ever recover from that – that loss is permanent. This downturn has hurt, but not nearly as bad as the Nightmare. But as long as they continue to throw off cash, then I’m OK keeping them in my portfolio.
On a more positive note, I’ve been contributing my helping hand to the Canadian economy (more specifically my local neighborhood’s economy) by spending money like crazy so far this year. So, if this recession gets really deep, it’s definitely not MY fault! It’s the other people out there who aren’t pulling their weight! ;0)
[...] Canadian Capitalist asked, When Will Your Portfolio recover? which shows that sometimes continuing to invest after losses is not a bad [...]
Novice: It is all about risk management, and absolutely a large emergency cash fund is a necessity at this time. Many people use lines of credit for this purpose, which I would never recommend, especially in this climate of tight credit – the bank can decide at any time that you are not credit-worthy and roll back the amount available. And this at the time you are most likely to need it…
In my case, my monthly net cash savings are going directly to the savings account (having maxed our TFSA’s for 2009), rather than the mortgage where I have historically directed the cash. I don’t have a particular target amount in mind yet, but expect to maintain this approach for the balance of 2009 and make a decision then on how to deploy the cash.
For most people, I think $100,000 is a bit more than should be kept in cash, even today. If we both lost our jobs, that amount plus EI payments would probably cover our expenses for the next 4 years.
While the amount of emergency cash required can be the subject of debate, the need for such a fund should not.
Novice: My post on Monday deals will deal with this topic.