Most stock market investors will find it nerve-racking to see their portfolios drop by 50% or more. But a large stock market crash is usually beneficial for our long term finances and we should welcome a bear market sooner rather than later or even not at all. 😀
How an early stock market crash creates more wealth
During a stock market correction, all the new money we invest will be used to purchase assets at cheaper levels. 🙂 These investments can have more time to compound and grow.
Even if we somehow could avoid a bear market for the next 30 years, [our] retirement wealth would likely be substantially better if we instead experienced an immediate bear market. ~Mark Hulbert
Most people my age will probably retire around 60 years old. That gives us about 30 more years to save for retirement. I found a chart below, courtesy of Mark Hulbert from MarketWatch that shows how the timing of a stock market crash affects the value of a retirement portfolio. It assumes a constant annual rate of return for 30 years, except a brief period where the stock market crashes similar to what happened in the 2007/2008 global financial crisis.
The red bar at the far left of the graph represents the portfolio’s value at the end of 30 years if a stock market crash happens right now in 2018. The far right is when it happens near the end of the 30 year period. In all cases plotted on the graph, the average annualized return for the 30 year period is the same, which is 5.9%. The only difference is when that market correction occurred along the way. 😉
As we can clearly see, our portfolio’s value 30 years from now will be highest ($4.3 million) if a downturn happens immediately, and lowest ($1.9 million) if it happens right before we retire. Wow! We will have $2.4 million more if a major bear market breaks out now, rather than later, even when the overall annualized investment return is the same. That’s a huge difference. 🙂
If the stock market faces no correction, and instead steadily gains 5.9% every year for the next 30 years then we will have $2.4 million at retirement, which is still $1.9 million lower than if there was an immediate stock market crash. A future without any bear market at all would result in less wealth than one in which there is an early bear market.
Most investors focus heavily on annual returns. But now we know that the timing of a market correction also has a major impact on our retirement nest eggs.
This is why young investors who are still saving for retirement should not be trying to get out at the top of the markets. Instead we should embrace the next big market crash with open arms. The good news is we’ve been in a bull market cycle for nearly a decade already. Business cycles always go up and down, so the next major bear market could be just around the corner. I can’t wait. 😀
A bear market is good for investors building up a portfolio. However, the opposite is true for the older generation. A stock market correction for people who just retired will significantly reduce their wealth if they have too much exposure to stock investments. That’s why it’s important to manage risk and asset allocation throughout life. 🙂
Random Useless Fact