Opinion – Grain for Grain: Find out how long it took the S&P500 to pick up the price before the drop

We are returning to a market scenario in which the potential of how much you can lose by investing in the US stock market should not be your only concern. Most of the time we forget something that can be as bad as the magnitude of the drop. For Brazilians this disregarded factor is even worse. Yes, more worrying than the intensity of the devaluation.

The S&P500 depreciates in the year by more than 23%. For those who have already invested for five years, the total gain is still positive and exceeds 50%. Therefore, this drop can only be seen as a loss of part of the gains.

However, the view is not the same for those who invested after 2020. The American index is traded today at the same level as in December 2020. Therefore, all these investors have a negative return since their application.

Unfortunately, it was precisely during this period that many Brazilians exchanged investments in the Brazilian stock exchange for the American one.

Maybe you’re worried about how far the S&P500 could fall. Possibly you fear that the index may drop another 20%.

That shouldn’t be your only concern right now.

The big problem Brazilian investors face is their opportunity cost.

Currently, low-risk investments linked to the CDI should yield more than 13% per year.

Usually, when we invest in a risky investment, our concern is focused on the maximum that can be lost. In fact, the intensity of the loss is frightening.

However, when we have a high opportunity cost like the current one, the time it takes for the index to return to the price initially invested or to the previous level can be even more relevant.

Since 1950, the S&P500 has fallen for more than 23 weeks without returning to its starting price on 22 occasions. At the moment, it has depreciated for 24 weeks since the maximum reached at the beginning of the year.

Let’s analyze what happened in these 22 times that the S&P500 dragged before returning to the initial level of the decline.

The average time it took to get back to the starting point of the fall was 105 weeks, or two years.

The maximum time it took for it to return to the level of the beginning of the fall was 393 weeks, that is, seven and a half years. This took place between 1973 and 1980.

In a more recent period, investors have faced similar distress. Those who invested in the S&P500 in October 2007 only saw their investment return to the same initial value five and a half years later, at the end of March 2013.

Also, those who invested in the American stock market in March 2000 only recovered their money after more than seven years.

With the CDI yielding 13% per year, staying with zero yield for two years means you forgo a return of more than 27%. In five and a half years, an investment in this CDI represents a return of 95%. If you go seven and a half years without earning, the wasted profitability would be 150%.

It is very difficult to imagine that the S&P500 will drop an additional 27% in the next two years, but if it keeps oscillating sideways for the next two years, you will miss this 27% if you applied the CDI.

Likewise, it is not possible for an index to fall by more than 100%. But, you can miss 140% if what we are experiencing today is something similar to what happened to investors in March 2000.

With the higher opportunity cost as we are, that is, with the higher CDI, it is necessary to carefully analyze which risk to keep in the portfolio, as the recovery period becomes as important as the decline.

Michael Viriato is an investment advisor and founding partner of Investor’s House

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