As the DOW & S&P 500 hit new highs, ironically, in the minds of most investment professionals, is the next stock market crash. Many people are feeling like they should do something now, take money off the table or hedge or stop investing. With the emotional distress that a stock market crash would give to most people, I’d like to show the positive side of an otherwise emotional and mistake-ridden time of the (next) Crash.
Sure, I get it
If you’re close to your retirement with a mill or so in your accounts, I would be worried too and find ways to plan for my expenses and reduce some of the risks. But these thoughts and ideas make it to the millennial generation too, some of them haven’t even started investing yet.
Millennials should not fear
When next-gen investors hear these thoughts, the first thing that comes to mind is – Should I invest now or wait? What happens if I start investing and then the stock market crashes? If I wait, when do I know when is safe to get in?
No One really knows
The truth is that no one really knows what will happen to the stock market. The ones who pretend to know are the ones who you should stay further away. There have been people calling for a market crash since the market crashed and even more voices since 2013-2014. And the market (not listening to anyone) has kept going up. Now, if you understand the history of markets there’ll be a time these voices will be right, but that’s not a strategy to follow.
How to invest through the stock market crash and make money
Preparing for the next market crash (which is coming, we just don’t know when) I’ve looked at the last major crash and recovery starting in 2008. I then ran calculations as if you were the unluckiest person in the market and started investing at the very peak of the market in October 2008. Most millennials don’t have thousands to just dump in the market, so the best recommendation that fits with their pockets as well as with the strategy is to invest periodically –month after month.
The most unlucky person starts investing
This most unlucky person is my demonstration to show that even if you start investing at the very top, not only it is not a bad thing, but in addition to the profits it will also give an unrepeatable mental strength on understanding investing through its worse time and come on the other side much stronger and also wealthier.
I use a simple diversified ETF that tracks the S&P 500 –symbol is SPY– one of the earliest, largest and most liquid, easy to trade ETF that represents the 500 largest companies in the US.
You start a monthly investment plan with $500/month on October 2008, at the peak of the market. Looking at the chart below, you can see that SPY drops almost 50% in the next 6 months hitting its lowest point in March of 2009 (green line and right axis.) The red line represents your original investment as you put $500/month, while the blue line represents your portfolio value as the market moves down.
The market took over 5 years to recover
This stock market crash was the worst we’d seen since the Great Depression in the 30s, and it took over 5 years to reach back the highest point of 2008. It was not until March of 2013 that the market reached its previous high point, but your portfolio did something else. While investing $500/month you were buying really cheap shares (that were also paying dividends) and had invested a total of $33,000 during this 5+ year period. You accumulated about 295 shares of SPY (reinvesting the dividends) for a portfolio value of over $45,700 and a 38% return on your $33K total investment. Let me say it again: 38% return when the market did 0%. And I used $500/month as an example, but the returns in percentage are the same for any amount.
Of course, this strategy works for your long-term goals (10-15+ years out) where you can wait the crash out, not for your short-term goals or money that you need soon.
Let that sink in
The unluckiest person in investing starting to invest at the very peak followed by the greatest stock market crash in the market since the Great Depression, MADE MONEY (38%+) during the next 5 years while the market went back to where it was (0% growth). Also, your portfolio (blue line) was below the original investment (red line) for about 1 year from August 2008 to August 2009, not 5 years like the market. If this is the worst case scenario of starting to invest then ‘what is there to fear, but Fear itself.’
The next stock market crash can come unexpectedly and no one knows when, but the point is that if we’re starting to invest and do it methodically not only we will come ahead after the storm, but also have the courage to do it again – having mastered the toughest part of this ‘game’ –Staying IN when all your emotions and feelings (and others) tell you to Get OUT.
