Every time the stock market falls, no really, every single time, a friend of mine texts me the same thing: “Make it stop.” And every time I tell him the same thing- “You should hope stocks go a lot lower.”
For people still contributing to their retirement accounts, they shouldn’t fear lower prices, they should pray for them.
Let’s look at a real world hypothetical example.
I sorted all twenty-year rolling returns for the S&P 500 and plucked returns near the median. Stocks had nearly identical compound annual growth rates in the twenty years from December 1933-November 1953 and December 1954-November 1973 (10.791%/10.779%).The chart below shows that $1 invested had the same ending values over each of these twenty-year periods.
The next chart shows what would have happened (this is make believe land) if an investor started with $100 and bought stocks every month, increasing their contributions by 0.5% with each purchase.
Although they had the same compound annual growth rate, the one that got the pain out of the way early was left with 65% more money after 20 years.
The massive difference is due to the timing of market declines. The gray line experienced a brutal bear market in the fourth year (1937) while the other didn’t experience one until the 16th year, when the percent decline had a much bigger effect on the overall dollars.
Of course the path of stocks are completely out of our control, and it’s worth mentioning the obvious; what’s good for people contributing to their portfolios is not good for people who are drawing from them.
Young investors should not try to avoid lower prices, they should welcome them with open arms. And while it sure feels good to see stocks go higher every month, what feels best in the present isn’t what’s best for us in the future.
Michael Batnick is a managing partner at Ritholtz Wealth Management. He is the co-host of Animal Spirits, What Are Your Thoughts, and The Compound and Friends. For disclosure information please see here.