Annual maximum decreases versus annual return

The variation of short-term prices is the price that must be paid in exchange for long-term profitability

Since last January 25, the date on which the SP500 reached a maximum of 2,872 points, the bags fell by just over 8% in a few days. Last Tuesday the media rushed to report that the US stock market had experienced the largest decline in its history, with the Dow Jones, an index composed of the 30 largest US companies, 1,175 points.

Given that the media knows for certain that viewers pay more attention to negative news than to positive news, because our brain is programmed to survive and otherwise it would have led to failure, they rushed to tell the story of the way they find it most convenient, and give the absolute value of the fall instead of the relative. And that data, in percentage, is the 531st worst day in the history of the Dow Jones.

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Evidently, it is not the same, in points, a fall of 4% on a value of 13,000 points that was in 2008 that of the environment of 24,000 as it is currently. And the data, to be representative, has to be given as a percentage.

The media do not favor the investors, frightening them with distorted and short-term data that take them away from the market and create the uninformed saver with the feeling that the stock market is a casino in which all the money can be lost at any time and that you have to run at the minimum correction.

The variation of short-term prices is the price that must be paid in exchange for long-term profitability. It is an inevitable part of the process, and we must remember it again and again so as not to be carried away by fear and lose the opportunities that arise.

In the attached graph you can see the annual revaluation of the SP500 from the year 1980 to 2107 in the vertical bar, while the point represents the maximum decrease during the year.

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Reviewing the history always gives us a good reference, and if we analyze the historical data since 1980, we see that in all but one year (in particular 2012) there have been more intra-annual decreases than the final annual result and that Although the average value of the maximum annual decrease was 13.8%, profitability has been positive in 29 of the 37 years.

The last two years have not been normal in the markets, being exceptionally stable.

A return to normality should be seen as positive since it will generate an environment in which opportunities to buy at good prices due to corrections that last days, weeks or even several months will appear. For this, having some liquidity will give us the right tools to take advantage of the situation when it arises.

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