Do All Really Bad Price Drops Happen at Times of High Valuations?

Rob Bennett asked me this question. He left the details to me. He is interested in declines that persist.

Rob is not concerned with temporary drops such as occurred in 1987. From January 1987 to January 1988, the S&P500 index lost only 5.3% (nominal) in spite of the sharp break in October.

Data Collection

I brought up my Deluxe Calculator Version V1.1A08. (It incorporates a series of upgrades to the Retire Early Safe Withdrawal Calculator Version 1.61 of November 7, 2002.) I set the initial balance equal to $100000. I set the withdrawal rate equal to zero. I set the stock allocation equal to 100%. I set expenses equal to zero. I selected the CPI for inflation adjustments.

I copied both NOMINAL and REAL balances for years 1 through 10 to a spreadsheet. Later, I compared all balances with $70000, $80000 and $90000. I recorded those balances that fell below these thresholds. I placed zeroes in the remaining cells.

The typical programming line was as simple as
=IF(G425<80001,G425,0).

Then I used the fill handle for all other cells in the table.

I added the year, P/E10 and single-year P/E to each row.

I condensed individual tables by copying only those rows with balances other than zero.

I analyzed the non-zero rows.

This analysis provides us with several insights related to accumulation.

I repeated the process with all of the dividends removed. Those results should be helpful for those intending to live on dividend income alone.

REAL Dollar Balances with All Dividends REINVESTED

I found no useful generalizations when I looked at REAL dollar balances with All Dividends REINVESTED.

REAL Dollar Balances Below $90000 with All Dividends REINVESTED

There were 40 years that had balances below $90000 at least once within the first decade. P/E10 ranged between 6.0 and 27.1. Single-year P/E values included 5.7 and 23.7.

By looking only at years 8, 9 and 10, I was able to reduce the number of years to 16. P/E10 varied between 11.6 and 24.1. Single-year P/E values included 11.7 and 18.7.

REAL Dollar Balances Below $80000 with All Dividends REINVESTED

There were 27 years that had balances below $80000 at least once within the first decade. P/E10 ranged between 10.4 and 27.1. Single-year P/E values included 6.3 and 19.2.

By looking only at years 8, 9 and 10, I was able to reduce the number of years to 16. P/E10 varied between 13.1 and 24.1. Single-year P/E values included 12.9 and 18.7.

REAL Dollar Balances Below $70000 with All Dividends REINVESTED

There were 14 years that had balances below $70000 at least once within the first decade. P/E10 ranged between 11.0 and 27.1. Single-year P/E values included 6.3 and 18.1.

By looking only at years 8, 9 and 10, I limited the selection to years 1912, 1913, 1966 and 1973. P/E10 varied between 13.1 and 24.1. Single-year P/E values included 13.4 and 18.1.

NOMINAL Dollar Balances with All Dividends REINVESTED

I was able to identify excellent generalizations when I examined NOMINAL dollar balances below $80000 and below $70000.

NOMINAL Dollar Balances Below $90000 with All Dividends REINVESTED

There were 26 years that had balances below $90000 at least once within the first decade. P/E10 ranged between 6.0 and 27.1. Single-year P/E values included 6.3 and 19.2.

By looking only at years 6, 7, 8, 9 and 10, I limited the selection to years 1927, 1928, 1929, 1937 and 1969. P/E10 varied between 13.2 and 27.1. Single-year P/E values included 10.9 and 17.8.

NOMINAL Dollar Balances Below $80000 with All Dividends REINVESTED

There were 9 years that had balances below $80000 at least once within the first decade. They were 1906, 1907, 1928, 1929, 1930, 1931, 1937, 1972 and 1973. P/E10 ranged between 16.7 and 27.1. Single-year P/E values included 12.7 and 18.1.

There were no balances below $80000 after year 7.

NOMINAL Dollar Balances Below $70000 with All Dividends REINVESTED

There were 5 years that had balances below $70000 at least once within the first decade. They were 1928, 1929, 1930, 1931 and 1973. P/E10 ranged between 16.7 and 27.1. Single-year P/E values included 13.9 and 18.1.

There were no balances below $70000 after year 6.

Summary with Dividends REINVESTED

There were no useful generalizations when I looked at REAL dollar balances with All Dividends REINVESTED.

I was able to identify excellent generalizations when I examined NOMINAL dollar balances below $80000 and below $70000.

When balances fell below $80000 at least once within the first decade, P/E10 ranged between 16.7 and 27.1. Single-year P/E values included 12.7 and 18.1.

There were no balances below $80000 after year 7.

When balances fell below $70000 at least once within the first decade, P/E10 ranged between 16.7 and 27.1. Single-year P/E values included 13.9 and 18.1.

There were no balances below $70000 after year 6.

REAL Dollar Balances with All Dividends Removed

There were no useful generalizations when I looked at REAL dollar balances with All Dividends Removed.

REAL Dollar Balances Below $90000 with All Dividends Removed

There were 70 years that had balances below $90000 at least once within the first decade.

By looking only at years 8, 9 and 10, I was only able to reduce the number of years to 39.

REAL Dollar Balances Below $80000 with All Dividends Removed

There were 44 years that had balances below $80000 at least once within the first decade.

By looking only at years 8, 9 and 10, I was only able to reduce the number of years to 33.

REAL Dollar Balances Below $70000 with All Dividends Removed

There were 31 years that had balances below $70000 at least once within the first decade.

By looking only at years 8, 9 and 10, I was only able to reduce the number of years to 23. P/E10 ranged between 10.4 and 27.1. Single-year P/E ranged between 10.0 and 18.7.

NOMINAL Dollar Balances with All Dividends Removed

I was able to identify no useful generalizations except when the NOMINAL dollar balance was below $70000 with All Dividends Removed.

NOMINAL Dollar Balances Below $90000 with All Dividends Removed

There were 58 years that had balances below $90000 at least once within the first decade.

NOMINAL Dollar Balances Below $80000 with All Dividends Removed

There were 44 years that had balances below $80000 at least once within the first decade.

By looking only at years 8, 9 and 10, I was only able to reduce the number of years to 20.

NOMINAL Dollar Balances Below $70000 with All Dividends Removed

There were 15 years that had balances below $70000 at least once within the first decade. P/E10 ranged between 9.7 and 27.1. Single-year P/E values included 10.1 and 18.1.

By looking only at years 1, 2, 3, 4 and 5, I limited the selection to years 1873, 1874, 1881, 1906, 1927, 1928, 1929, 1930, 1931, 1937 and 1973. P/E10 varied between 13.2 and 27.1. Single-year P/E values included 10.1 and 18.1.

By looking only at years 1, 2 and 3, I limited the selection to years 1906, 1929, 1930, 1931, 1937 and 1973. P/E10 varied between 16.1 and 27.1. Single-year P/E values included 13.9 and 18.1.

Summary with Dividends Removed

There were no useful generalizations when I looked at REAL dollar balances with All Dividends Removed.

I was able to identify no useful generalizations except when the NOMINAL dollar balance was below $70000 with All Dividends Removed.

When balances fell below $70000 at least once within the first decade, P/E10 ranged between 9.7 and 27.1. Single-year P/E values included 10.1 and 18.1.

When balances fell below $70000 at years 1, 2, 3, 4 and 5, P/E10 varied between 13.2 and 27.1. Single-year P/E values included 10.1 and 18.1.

When balances fell below $70000 at years 1, 2 and 3, P/E10 varied between 16.1 and 27.1. Single-year P/E values included 13.9 and 18.1.

Answering Rob’s Question

Do All Really Bad Price Drops Happen at Times of High Valuations?

When Dividends are REINVESTED:

The NOMINAL price dropped below $80000 only when P/E10 was 16.7 or higher. The single-year P/E was 12.7 or higher.

The NOMINAL price dropped below $70000 only when P/E10 was 16.7 or higher. The single-year P/E was 13.9 or higher.

When Dividends are Removed:

The NOMINAL price fell below $70000 in years 1, 2 and 3 only when P/E10 was 16.1 or higher. The single-year P/E was 13.9 or higher.

Conclusions

The really bad price drops in NOMINAL dollars occurred only when P/E10 was higher than its median level of 14 to 15 when dividends are REINVESTED.

There were instances when really bad price drops in NOMINAL dollars occurred at P/E10 levels below 20 when dividends are REINVESTED.

Removing dividends causes balances to fall rapidly. However, within the first three years, the really bad price drops in NOMINAL dollars occurred when P/E10 was higher than its median level of 14 to 15.

There were NO instances when really bad price drops in NOMINAL dollars occurred at bargain P/E10 levels.

Have fun.

John Walter Russell
October 22, 2005

Rob Bennett's web site is PassionSaving.com .