FREE NEWSLETTER
Go to main Forum page »
“What, me worry?” — Alfred E. Neuman
What should worry me more—inflation or market declines? Both reduce the value of our savings, but they behave very differently. Inflation tends to work slowly and quietly. Market declines, by contrast, often happen quickly and visibly.
Consider several bear markets—defined as declines of 20% or more in the S&P 500.
| Bear Market | Market Decline | Time to Bottom | Time to Recover |
| 1973–74 Oil Crisis | -48% | 21 months | ~7 years |
| 1987 Crash | -34% | 3 months | ~2 years |
| 2000–02 Dot-com Bust | -49% | 30 months | ~7 years |
| 2008 Financial Crisis | -57% | 17 months | ~4 years |
| 2020 COVID Crash | -34% | 1 month | ~5 months |
| 2022 Inflation Bear Market | -25% | 9 months | ~2 years |
Market declines are dramatic. A drop of 20% to 50% makes headlines and captures attention. I feel those losses immediately.
Inflation rarely produces the same kind of head spinning headlines. Instead, inflation gradually erodes purchasing power. Inflation over long periods has often fallen somewhere between 2% and 4%. For this example, let’s use 3%.
At 3% inflation, purchasing power declines roughly as follows:
| Years | Purchasing Power Remaining |
| 10 years | ~74% |
| 20 years | ~55% |
| 30 years | ~41% |
Being invested in businesses—through stocks or stock funds—has historically helped investors keep up with or outpace inflation over long periods, though the path is rarely smooth.
Inflation tends to be slow but persistent. Market declines tend to be sharp but temporary.
Both are simply part of the investing journey.
Some investors maintain a portion of their portfolio in cash as “dry powder,” available if markets decline sharply. How much to hold varies widely. Some hold very little. Others hold more. At times, even well-known investors have accumulated significant cash reserves.
Which should worry investors more?
Research assistance for historical market data was provided with the help of an AI research assistant.
.
At my stage of life 68 years old inflation is more of a concern. With a 45/45/10 allocation I have plenty of time for markets to recover from a significant drop (although with only 45% equity exposure my portfolio should not drop nearly as much as the market), and go higher.
Per AI since I retired core inflation has cumulatively increased by 24%, and each increase going forward is compounded. Being a math wizard I know that that means a 1 million dollar retirement portfolio when I retired can only purchase 760K in goods today.
Ironically my wife mentioned she is a little nervous that we have spent so much money already this year (primarily due to a trip to Barbados in February to escape the cold).
I think I allayed her fears when I pointed out three facts: 1) I did a back of the envelope calculation of our non discretionary spending and it only totals $40K per year as we own our house and cars thus if necessary we could contract our expenses down to next to nothing, 2) our portfolio is at nearly the same as it was when we retired in 2020 despite buying two high end new Toyotas, 3) I looked at the financial plan calculated three years ago with a probability of 93% success and we are 150K ahead of what that balance was projected to be.
So in a nutshell I’m chill, her 🤔