Measured Risk Portfolio

Buy and Hold

and the Likelihood of Recovery

We can see from the previous chart that a portfolio loss of 35% requires a 54% gain to restore the portfolio to whole. So, historically speaking, how long has it taken the S&P 500 to generate a 54% gain? From 1970 through 2009, the S&P 500 Index has never had a one-year return in excess of 54%. The largest one-year return was 37.58% in 1995. Therefore, based on historical returns of the S&P 500 Index over the past 40 years, a loss of 35% will require more than one year to recover.


*Probabilities calculated from historical returns of the S&P Index from 1970 to 2015
Source: Measured Risk Portfolios

As shown in the chart above, the S&P 500 Index has a 17.8% chance of gaining 54% (as a cumulative percentage return) within a contiguous two-year period and thus recovering from a 35% loss. The probability of fully recovering from a 35% loss increases to 34.2% over a holding period of three years. There is a nearly 57% chance of recovery over a four-year period, and a 61% chance of recovery over five years. All of these loss recovery estimates are based on the performance of the S&P 500 Index over the past 40 years, from 1970 to 2009. They assume that no money is withdrawn from the account during the recovery period and that no additional money is invested. Taxes and inflation have not been considered in this analysis. And, as always, past performance is not a guarantee of future results.

Smaller portfolio losses, such as 10%, are more quickly resolved. The S&P 500 Index generated a single-year gain of 11% or more (11% being the minimum gain needed to restore a portfolio following a loss of 10%) in 21 separate years between 1970 and 2009. Therefore, based on historical return patterns, there is a greater than 50% chance that the S&P 500 could recover from a 10% loss within one year.

More serious losses require longer recovery time, and this might not be feasible. For instance, a portfolio invested completely in the S&P 500 Index that loses 50% has very small chance of recovery within one or even two years.