Having suffered such great losses in the stock market over the past 12 months many are reluctant to sell their portfolio at such a low point.  Professionals in the equities industry encourage clients to hold on to their stock market investments with the anticipation of a market rebound which will enable them to recoup their portfolio values.

We decided to examine just how long it might take a portfolio loss of 38% to come back to full value.

Assuming an optimistic scenario of a 12% annual return each year over ten years, with a 1% maintenance fee, the Variable Assumption Calculator software showed a recovery to full value after 5 years.  However, this calculation does not take into account the effect of any negative years.  In fact in the last 25 years there has not been one 10-year period with consecutive increases in value for the Dow Jones Industrial Average.  In the most recent 10-year period the Dow has experienced 5 negative years.

So just as an exercise for educational purposes only we ran the Variable Assumption Calculator software with two more hypothetical scenarios:

1. The first two years at a 12% annual return, the third year at a negative 10% and the remaining 7 years at 12%. With this scenario it was 7 years before the portfolio returned to its pre-crash value.
2. Using the same annual return as in the above exercise but substituting a negative 5% for year 5, the result showed that you would be well into the 9^th year before your portfolio came back to its pre-crash value.

Also, let’s not forget the lost opportunity cost effect which has not been taken into consideration in these hypothetical assumptions. 

For those of you truly wishing to purchase real estate it would be helpful to take a look at the bigger picture of what the ultimate result might be for the same duration of years if your monies were structured to include a combination of SAFE HARBOR earnings and real estate ownership.  The SAFE HARBOR part of your plan would provide downside protection with the opportunity for upside earnings potential. While the real estate portion of your plan gives you the possibility of appreciation in value of the real estate, beneficial tax offsets for either occupied real estate or investment property, intrinsic value or rental income as well as the benefit of a step-up in cost basis upon inheritance for your heirs.  If you intend to purchase this real estate for your home, second home or vacation rental, it is hard to arrive at a hard return on investment figure for the intrinsic value the use and enjoyment of the real estate purchase would bring you.