DIY Investor Magazine
| August 2017
23
The first thing to notice about the chart is that there are
an awful lot of drawdowns! In fact, because the market
doesn’t make new highs every day, it is usually in a
drawdown state. And this can have a psychological
effect on investors.
If you look at a typical long-term chart of the stock
market, and many individual shares, you will usually
see a line that starts at the bottom left and increases
(moderately steadily) to the top right.
This is a good thing – stocks go up in the long term!
However, this chart does not necessarily reflect the
actual experience of being invested in the market over
this period. For this, the drawdown chart above may
more accurately represent the feelings of investors.
This is because investors’ portfolios are underwater for
most of the time, i.e. the portfolio value is below its peak
value (which will likely be a recent and strong memory
for the investor).
The table below down how long the market spends at
various drawdown levels. So, for 16% of the time from
1969, the market had a drawdown of 5%-10%, and it
was in a drawdown state of over 20% for 27% of the
time. And, while a drawdown of just up to 5% may not
seem very much, in practice it is 31% of the time that
investors are likely feeling slightly disgruntled, having
“lost” money.
Drawdown
Time spent
0% to 5%
31%
5% to 10%
16%
10% to 20%
21%
Greater than 20% 27%
So, while the data shows us that stock markets increase
over the long term, the direct personal experience of
investing may be for investors largely that of a prevailing
sense of loss. This sense of loss is something that
investors have to learn to live with.
To purchase this book for the special DIY Investor price
of £18 + P&P (RRP £25) use the following promotional
code when checking out at the Harriman House online
bookshop: DiYEE15.
The following chart shows the drawdowns for the FTSE All-Share for the period 1969-2016.
