Risk, Volatility, and the Word 'Bear'

The market's long-run average return is about 10% a year. The market has almost never actually returned 10% in a year. Understanding that sentence is most of what separates investors who last from investors who don't.

Last verified 2026-07-16

The average is a summary, not a forecast

Since 1928 the S&P 500 has returned roughly 10% a year with dividends reinvested — about 7% after inflation. Both numbers are real and both are averages over nearly a century.

What they are not is a description of any particular year. The average is assembled out of years like +32%, −37%, +29% and −18%, and years landing near 10% are the exception. A single year is not a typical draw from a narrow range; it is one sample from a very wide one.

This is why the average is dangerous heard as a promise. Someone who invests expecting 10% and meets −18% in their first year does not experience a normal outcome — they experience a betrayal, and they sell. The average was never wrong. It was answering a question about decades while they were asking about a year.

Losses and gains are not symmetric

A 20% loss followed by a 20% gain does not put you back where you started. $100 falls to $80; a 20% gain on $80 is $16, leaving $96. You are still down.

The asymmetry gets worse as losses deepen, because the gain has to be earned on a smaller base. A 33% loss needs a 50% gain to recover. A 50% loss needs 100%. A 57% loss — the 2007–2009 decline — needed about 133%.

Two useful conclusions follow. Avoiding a deep drawdown is worth more than it looks, which is the honest case for holding some bonds and cash rather than a purely emotional one. And the market's recoveries from those depths were not modest bouncebacks: getting back to even from −57% is more than a doubling, and it happened.

Nobody declares a bear market

The vocabulary sounds official and none of it is. A 10% decline from a recent high is a correction. A 20% decline is a bear market. A 20% rise from a low is a bull market. All media and industry convention — no agency defines, declares or dates them.

The round numbers are what make them feel authoritative. Nothing is structurally different about a market down 19.6% versus one down 20.1%, but only the second gets the headline — and the headline itself moves behaviour.

Drawdowns are also measured differently from calendar-year returns, which causes a lot of confusion. The 2007–2009 decline was about 57% peak to trough, spanning parts of three years; calendar 2008 alone was about −37%. Both are correct and they describe different things.