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Wishing For A Market Crash

I’m hoping for a stock market crash.  I know, I know, who wouldn’t?  As an investor who plans to live for a few more decades, a stock market crash is about the best thing that could happen to me.  I hate paying full price for anything, and stocks are no different.  But, recently, the S&P 500 just seems to be going in the wrong direction: up.  Oh, what I wouldn’t give for a stock market crash!  And let it be a big one, too!  For the vast majority of investors, a crash would be a blessing – they just don’t know it.  Here’s why most of us should be wishing for a stock market crash:

 

High Prices Suck

The stock market is one of the only places where consumers seem to always want higher prices.  We don’t celebrate when gasoline prices rise, or the price of cars, or food.  When your favorite restaurant raises its prices, you probably complain a little bit inside.  So, why do you want stock market prices to keep rising?

 

You may think the answer is because stocks are an investment, not a product we consume, like those other things I mentioned.  But, if you plan to continue investing in the future, than you should be wishing for low prices, not high prices.  High stock prices are only a good thing if you are done investing – retired and living off your investments.  For the rest of us, let’s hope stocks go on sale!

 

If you’re going to buy something in the future, lower prices are a good thing.

 

The Last 10 Market Corrections

The S&P 500 has always been a great place to put your hard-earned money.  With dividends reinvested, the compound annual return rate has been over 10% since its predecessor, the Composite Index, was first created in 1923.

 

But, there has been tremendous variability.  Prices go up, and they go down.  In the last twenty years, there have been ten corrections of 10% or more – once every two years, on average.  The last correction ended in February 2016.

 

Corrections in S&P500 1997 – 2017

Start DateEnd DateCorrection
11/3/20152/11/2016-13.3%
5/21/20158/25/2015-12.4%
4/29/20118/25/2015-19.4%
4/23/20107/2/2010-16.0%
10/9/20073/9/2009-56.8%
11/27/20023/9/2009-14.7%
3/24/200010/9/2002-49.1%
7/16/199910/15/1999-12.1%
7/17/19988/31/1998-19.3%
10/7/199710/27/1997-10.8%

Source: https://www.yardeni.com/pub/sp500corrbeartables.pdf

 

It’s like having a discount sale at your favorite investing store once every couple of years!  I don’t know about you, but I’d rather buy something on sale than not. If you invested at the bottom of each correction here’s how much return you would have earned so far:

 

Cumulative Returns With Dividends Thru October 2017, After Corrections

If You Invested On This Date:You Have Earned:Annual Return:
2/11/2016
44%23.7%
8/25/201542%17.5%
10/3/2011156%16.5%
7/2/2010175%14.8%
3/9/2009321%18.1%
3/11/2003273%9.4%
10/9/2002285%9.4%
10/15/1999144%5.1%
8/31/1998220%6.2%
10/27/1997251%6.2%

Source: https://finance.yahoo.com/quote/%5EGSPC/history/  | http://www.econ.yale.edu/~shiller/data.htm

 

Not bad, amiright?  40%, 150%, 300%? Yes, please!  Actually, some of those cumulative returns aren’t so great considering that they were earned over close to twenty years.  251% cumulative gain since November 1997 comes out to only 6% per year, which is lower than the S&P 500’s historic rate of return of about 10%.

 

But what if you had invested BEFORE stocks went on sale?  Here are cumulative returns if you had invested at the beginning of the same ten corrections:

 

Cumulative Returns With Dividends Thru October 2017, Before Corrections

If You Invested On This Date:You Have Earned:Annual Return:
11/3/2015
26%12.1%
5/21/2015
25%9.6%
4/29/2011
105%11.7%
4/23/2010132%11.8%
10/9/2007
84%6.3%
11/27/2002219%8.1%
3/24/200099%4.0%
7/16/1999115%4.3%
7/17/1998158%5.0%
10/7/1997213%5.8%

Source: https://finance.yahoo.com/quote/%5EGSPC/history/ |  http://www.econ.yale.edu/~shiller/data.htm

 

Wait a minute! Those returns don’t look so bad either!  No, they’re not bad (stay with me).  They’re not as good as if you invest AFTER the correction, but you can certainly do much worse.  And that’s why it’s always a good time to invest in the stock market.  As long as your investment horizon is more than a few years, you pretty much can’t go wrong.

 

The Best Time To Invest

They say the best time to invest is when there is blood on the streets.   That’s been the wisdom of highly successful investors for generations.  Don’t let the bull-hype of the 24-hour financial news cycle let you forget that.  The dark days of March, 2009?  Perhaps it was the best investing opportunity of our lifetimes.

 

Looking at the last twenty years 1997 – 2017, corrections are great for boosting returns.

 

Over the last twenty years, investing after a correction boosted average annual returns by nearly 5% when compared to before the correction.  Some corrections have proven more lucrative than others.  But, the results are clear.  If stocks are a good investment, then stocks on sale are a really great investment!  And that is why I’m wishing for a market crash.

 

Investing in the S&P 500 after the last 10 corrections boosted annual returns by 5% on average, when compared to before the corrections

 

The problem is that we can’t predict when the market will correct.  If you could, you’d just hold onto your cash and wait until after each correction to invest.  But, if anyone tells you they can predict the next stock market crash, run, do not walk, to the nearest exit.  As individual investors, all we can do is continue investing, and just hope for a stock market crash.

The Joy Of A Bear Market

None of this would be possible without the joy of a beautiful bear market. I’m hoping for a market crash because it’s a tremendous opportunity.

Sure, seeing your portfolio diminish day after day can be about as fun as a prostate exam.  A lot of investors just want to be done with it, so they sell at the worst possible time.  It’s been shown beyond a reasonable doubt that panicking during a bear market is about the worst thing an investor can do.  Many of us do it anyway.

 

But bear markets should be joyous times for most investors.  Time to celebrate! Stocks are on sale.  You can lock in big-ass gains.  It’s a chance to accelerate your path financial to freedom!

 

Nothing Good Lasts Forever

After the ten market corrections from 1997 to 2017, it took on average just over one year for the S&P 500 to regain new highs (not including dividends).

 

But that number is heavily skewed because it includes two of the worst market crashes in the last half century: the 2000 – 2002 Dotcom Bubble and the 2007 – 2009 Financial Crisis.

 

If you ignore those two major events, the remaining eight corrections that occurred in the last twenty years took a mere 115 days on average before the S&P 500 set new highs again – about four months! If you add in dividends earned, it’s even less time.

 

So most market corrections are really more like a flash sale.  Like the door busters at a big box on Black Friday – get ’em while they’re hot!  A stock market correction is like a flash-in-the-pan chance to goose your total return.

 

But what about those two major events – the Dotcom Bubble and the Financial Crisis?  It took 56 and 49 months, respectively for the S&P 500 to recover from those crashes (not including dividends).  That’s still only 4-5 years.  It’s still not a long time for a long term investor.

 

Wishing For A Market Crash

4-5 years is like, nothing for any investor with a multi-decadal time horizon.

 

Unless you are already retired and living off your investments, or about to retire in the next couple of years, then a major market crash is your best friend. It’s a chance for smart investors to lock in big returns.  A market crash is the best thing that could happen to most of us.

 

As a 40-something, I intend to be around for a while longer.  I’m wishing for a sale.  A few months – or a few years – of lower prices.  I’m really wishing for a market crash!

 

Cheers,

Jojo Bobo

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2 Responses
  • Ann
    November 20, 2017

    I think all young people should be required to take a course in “Investing 10” in either high school or early college. Buying high and selling low just doesn’t work, ever!!!
    Well written jojo, and we totally agree.

    • Ann
      November 20, 2017

      I think all young people should be required to take a course in “Investing 101” in either high school or early college. Buying high and selling low just doesn’t work, ever!!!
      Well written jojo, and we totally agree.

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