A chart of a stock market over 50 years can look like a calm line going up. Zoom in and it is anything but calm. There are years when the line falls by a third, and decades when it goes nowhere. Long-term investors do not avoid these falls. They live through them. This lesson shows what that has looked like in the past, so a fall does not surprise you when it comes.
Before we start: what do you think?
Japan's main stock index reached a record high at the end of 1989. How long did it take to close above that record again?
✗ Far too short: the index fell much further after 1989 and stayed low for decades.
✗ Ten years later it was still far below the 1989 record.
✗ Twenty years later, in 2009, it was close to its lowest level since the record.
✓ Right: it first closed above the 1989 record in February 2024.
Two words: volatility and drawdown
Volatility is how much and how fast prices swing, up and down. A market that moves 1% on a normal day and 5% on a bad day is more than one that moves 0.2%.
A drawdown is the fall from the highest value so far to where you are now. If your investment was worth €10,000 at its peak and is now worth €7,000, you are in a 30% .
Volatility is the daily noise. A drawdown is the hole you may have to climb out of. For a long-term investor, the drawdown is what really tests you.
Quick check
Your investment peaked at €10,000 and is now €7,000. What is your drawdown?
Four big falls from history
These are falls in the price level of major . They do not include , which would have shortened the recovery a little, or , which would have made it longer in real terms. The numbers are rounded.
United States, 1929 to 1932. After the 1929 crash, a main index of large US companies kept falling for almost three years. At the bottom it was about 89% below its peak. It did not return to its 1929 level until November 1954, about 25 years later.
Japan, 1989 to 2024. Japan's main stock index peaked at the end of 1989. By March 2009 it was about 82% lower. It first closed above the 1989 record in February 2024, about 34 years later.
United States, 2007 to 2009. In the global financial crisis, the main index of large US companies fell about 57% from its peak in October 2007 to its low in March 2009. It closed above the 2007 peak again in March 2013, about five and a half years after the peak.
United States, 2020. When the pandemic hit, the same index fell about 34% in about one month, from February to March 2020. It reached a new record in August 2020, about six months after the peak.
Look at the range. One fall was repaired in six months. Others took 25 and 34 years. Nobody knew in advance which kind of fall they were in.
Quick check
Do the recovery times above include dividends and inflation?
Why deep falls are so hard to repair
Losses and gains are not symmetrical. After a fall, you need a bigger percentage gain just to get back to where you were:
| Fall from the peak | Gain needed to get back |
|---|---|
| −10% | +11.1% |
| −20% | +25% |
| −34% | +51.5% |
| −50% | +100% |
| −57% | +132.6% |
| −82% | +455.6% |
This is the same maths as in the 1% rule for traders. The deeper the hole, the harder the climb.
Worked example: €10,000 through a 50% fall
Sara invests €10,000 in a broad stock fund. A crisis comes, and the market falls 50%. Her investment is now worth €5,000.
- If she holds, she still owns the same units. The loss stays on paper. To get back to €10,000, the fund must double (+100%). That might take a year or a decade. Nothing guarantees it.
- If she sells at €5,000, the loss of €5,000 becomes real and final. If the market later recovers, she is not there for it.
- If the money was meant for a flat deposit next year, she has no good choice at all. That money should never have been in stocks.
That last line is the real lesson. A long-term investor is not someone with nerves of steel. It is someone whose money does not need to come out during a fall.
Quick check
What is the best protection against being forced to sell during a crash?
The same lesson in any market
The tool below uses gold prices, not . But it shows something that is true in any market. A short window can look wonderful. The full period shows the falls you would have had to sit through.
When you see a chart in an advert, a video or a group chat, ask: "What happened before and after this window?" Stocks, , gold and all have their own deep drawdowns in history. Some assets have fallen even further than stock indexes and never recovered.
How long-term investors prepare
- Expect falls. A fall of 20% or more is not a sign that something is broken. It has happened many times in the past.
- Match the money to the time. Money you need within a few years usually does not belong in stocks.
- Diversify. A broad mix lowers the risk that one company or one country sinks you. (See Diversification.)
- Decide in advance. Write down what you will do in a 30% fall, before it happens. (See Investor behaviour.)
This is education, not advice. Check your own situation before you invest.
Key takeaways
- Volatility is how much prices swing. A drawdown is the fall from the peak to where you are now.
- Major stock markets have fallen by a third, a half, and even more than 80% in the past.
- Some falls recovered in months. Others took 25 or 34 years in price terms.
- After a 50% fall, you need +100% to get back. Deep holes are very hard to climb out of.
- Long-term investing works only with money that does not need to come out during a fall.
Try this
Take the amount you invest, or plan to invest. Write down what it would be worth after a 30% fall and after a 50% fall. Then answer honestly on paper: "If I saw this number on my screen, would I sell, hold or buy more?" Keep the sheet with your investment papers.