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Why You Should Embrace the Next Stock Market Crash

Mar 202018

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. 🙂

Stock Market Highs Are More Common Than People Think

Advice 6 Responses »

Feb 272017

New stock market highs aren’t that special. Here’s why.

Some people inaccurately believe that any time the stock market reaches a new high it must mean that we are near a peak, and it’s a sign that stock prices will probably fall soon. Many undisciplined investor may choose to pull out of the market when this happens. However doing so will almost always be the wrong decision. This is because stocks reach new highs all the time. And they usually go up even more in the following years.

This Bloomberg article explains that over the past 102 years from 1915 to 2017, the Dow Jones stock market index in the United States had hit 12 new highs every year on average. 🙂 That’s once per month. Another way to think about it is that the Dow experiences a new record high about 5% of the time. So it’s not really not that rare. 😉 The table below shows how the frequency of new highs are distributed over the decades.

Most of the time a record stock market high will lead to more highs.

If someone starts investing at age 30 and plans to live until 80, then he’ll have 50 years of time to invest in equities. Based on historical data for the Dow Jones, he will see roughly 600 new record highs during his investment duration. This is why selling stocks because we may have reached a new peak in the market is a very silly thing to do for long term investors.

Trying to sell high and buy low rarely works. Again, the facts clearly explain why this is the case. Over the same time period, (1915 to 2017), the one year average return for the Dow after it had reached an all-time high was 9%. The 3 year cumulative return was 21%, and the 5 year return was 32%. So even when stocks are at all time highs, they tend to move even higher in the years after. 😀

China’s Stock Market Volatility

Stocks 12 Responses »

Jul 102015

You’ve probably heard on the news about the stock market correction in China. Last year, Chinese stocks experienced huge gains and surged more than 140%. Oh my Buddha, that’s insane! 😯 But since June 2015, the market has dropped by almost a third in value. Some people in the media claim this is some sort of catastrophic event comparing it to the Great Depression.

But we know better. 😉 First of all, a 33% drop, after a 140% gain is not such a bad thing. In fact that’s a net positive return of 60% in about 18 months, so who’s complaining? 🙂 Secondly, due to strict foreign investment regulations only 1.5% of all the stock market shares in China are owned by foreign investors like Canadians and Americans. So this recent market decline has very little direct impact on investors outside of China. And lastly corrections inevitably happen after a parabolic upward trend, so this shouldn’t be a surprise to any informed investor. “Those who cannot remember the past are condemned to repeat it.” ~George Santayana

The Boom and Bust of China’s Stock Market

It all started a couple years ago when the Chinese government wanted to boost the country’s economy. It implemented policies making it easier for retail investors (average folks) to invest in the stock market. Things worked out even better than expected and the market quickly became detached from the fundamentals of the underlying economy. Last month the Shanghai Composite Index (SSE) started to fall. To make things worse many investors were investing on margin and had been forced to sell their stocks as their shares lost value which only perpetuated the downward momentum. 😕 Within a few weeks the SSE had dropped almost 33%. Here’s a comparison of stock markets over the last 12 months. (blue line = China, red line = Canada, yellow line = U.S.)

15-07-china-stock-market-shanghai-sse

Fiscal Update – June 2015 – Market Turmoil

Fiscal Updates 12 Responses »

Jul 042015

Greece is holding a referendum tomorrow, Sunday, on whether or not they want to accept the bailout terms from their creditors. I’m not great at economic forecasts but I feel like the majority will vote yes for better or for worse.

[Edit] The result is out. Greeks voted No, lol. This is why I’m not an economist. [/Edit]

In other news it hasn’t been a very good month for global markets. Both the U.K. FTSE 100 and the French CAC 40 indices are down about 4% for the month of June. But China experienced the most dramatic loss. The Shanghai Stock Exchange Composite Index fell by 25%. Sufferin succotash! ? A whole bunch of millionaires in China just lost 1/4 of their wealth in the span of 30 days.

Here in Canada our stock market index dropped 3.5%, not as bad as other countries, but still enough to wipe out any gains it’s accumulated so far in 2015. As a result my net worth is down for the first time in years, lol. This means my portfolio is finally large enough that my change in wealth is determined more by the fluctuations in the market than by my savings rate.

*Side Income:

Part-Time Work = $600
Dividends = $500
Interest = $0

*Discretionary Spending:

Fun = $100
Debt Interest = $1500

*Net Worth: (MoM)

Assets: = $897,400 total (-5000)
Cash = $2,500 (-2000)
Stocks CDN =$93,600 (-1300)
Stocks US = $65,100 (-200)
RRSP = $51,200 (-1500)
MICs = $15,000
Home = $259,000
Farms = $411,000

Debts: = $508,100 total (-4300)
Mortgage = $193,500 (-400)
Farm Loans = $200,700 (-500)
Margin Loan CDN = $29,600 (-1900)
Margin Loan US = $25,800 (+100)
TD Line of Credit = $26,000 (-1000)
CIBC Line of Credit = $10,000
HELOC = $18,200
RRSP Loans = $4,300 (-600)

*Total Net Worth = $389,300 (-$700 / -0.2%)
All numbers above are in $CDN. Conversion rate used: 1.00 CAD = 0.80 USD

This is why it’s important to understand our financial decisions. Warren Buffett said “if you understood a business perfectly and the future of the business, you need very little in the way of a margin of safety.”

For example, when I look at my assets listed above I know what purpose each line item plays in my financial plan to reach early retirement. I know why I have $2,500 in cash right now, not more, not less. When I look at any of my investments I know why it’s in my portfolio. As another famous investor Peter Lynch once said, “know what you own, and know why you own it.” 😀

Overreaction in a Market Correction

Economics, Stocks 12 Responses »

Oct 192014

Overreaction leads to market turmoil

Over the last several weeks investors saw a 10% correction in the Canadian stock market, and a 9% correction in the U.S. Someone with a $100,000 portfolio invested in index funds could have just lost $10,000. Ouch. 😐 Is this market sell off justified or is it simply an overreaction to some recent bad economic news? First, let’s review what those news are.

The Canadian dollar has dropped to a 5 year low
Germany’s economy is weaker than expected
The rest of Europe is still in a mess of unemployment and stagnation
Last week the Athens Stock Exchange in Greece tumbled more than 6% in one trading day.
ISIS is causing havoc in the Middle East
Ebola fears

I currently own shares in the Bank of Nova Scotia (BNS.) It’s one of the largest companies in the country and has been around for over 180 years. Over the last month the price of this stock fell 8%. Instead of asking where the stock will go from here, we should instead be asking does all the recent bad news justify an 8% drop in value for one of the largest banks in Canada? My answer is absolutely not. 😛 It’s important to remember that when we buy a stock we are literally owning a part of that company. This means we, as stakeholders in Scotiabank, are still entitled to split the $6.5 billion profit that the company makes every year, regardless of how the price of BNS shares performs in the short term.

14-10-overreaction

A lower loonie will likely spur economic growth and will not hurt Scotiabank’s profitability. Europe’s stalled economy is nothing new and Canadian banks don’t lend that much to Europeans anyway. The media has succeeded in sensationalizing the threat of Ebola in the U.S. Yes it’s a terrible disease, and there’s an outbreak in Africa. But Ebola will not hinder businesses in the U.S. and Canada from continuing to rake in profits. Literally more Americans have been married to Kim Kardashian than have died from Ebola – both a terrible fate. 🙁

For the intrinsic value of Scotiabank to actually fall by 8% substantial circumstances would need to be met, such as major accounting fraud or a 10% national unemployment rate, that would legitimately jeopardize the company’s ability to make money. The recent news is relatively trivial so an 8% correction of BNS shares seems like an overreaction. Imagine selling our stocks now only to see the markets rebound next month and regain all its losses. 😐

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