Volatility is the gift that keeps on giving.
How young professionals stand to gain the most from sell offs.
In planning, we talk about this idea of sequence of returns. Essentially, we know that the S&P 500 returns roughly 7-9% per year on average. Just don’t expect it to hit that range in any given year. Check out my old post about how abnormal it is to actually see the S&P 500 return its average annual return here.
Below is a great chart from Charles Schwab that illustrates the massive risk that different timing of market sell offs can impact someone’s portfolio. Each investor withdraws $50,000 annually and this inflates by 2% each year for inflation. In each year other than the back-to-back years of poor returns of -15%, the investors’ portfolios returned 6%. We can see how Investor 2’s portfolio actually gains value throughout the first 9 years.
When we work with clients, our retirement simulations always include some tough scenarios like back-to-back years of major sell-offs at the start of retirement to understand the durability of their financial standing.
This is a huge risk to retirees and we work to mitigate the sequence of return risk the minute we know that someone is planning to retire.
Usually, a bulky cash reserve can allow for the retiree to not have to dip into their portfolio at non-optimal times (such as when the market sells off). Rather, they have more than enough cash already carved out to support their lifestyle.
Now this isn’t really a factor for any of my readers. Basically, we don’t have to worry about this at all right now.
Not to root against the retirees, but young investors should be rooting for market sell-offs. As an asset accumulator, poor years in the market are absolute jet fuel for building wealth in the long-term.
Now of course, I say this half-jokingly. Market sell-offs can lead to job losses, which we are never rooting for. However, having the means to purchase discounted assets can be amazing for long-term growth.
This is what would happen if instead of drawing down assets, you were accumulating assets with the same sequence of returns.
The investor who began during the two worst years ends up with significantly more money than the investor who saw negative returns in years 10 and 11.
It is easy to get spooked by market volatility but the numbers don’t lie. Young investors stand to gain the most from market sell-offs, especially when it is early in their career.
Here is some perspective. I’ll list some companies, their stock prices before the ‘08 crash, their stock prices at the lows, and their current prices.
I promise you that any investor today would kill to have been picking up some of these shares at their ‘09 bottoms and even their pre-2008 tops!!
S&P 500
October 5, 2007 - $1,557
February 27, 2009 - $735
Today - ~$5,840
Amazon
December 7, 2007 - $4.72
November 14, 2008 - $2.09
Today - ~$208
Nvidia
October 19, 2007 - $.93
November 26, 2008 - $.16
Today - ~$117
I included the S&P 500 because most people are best served by investing in diversified portfolios and the S&P 500 is our usual benchmark.
I also threw in some hot names just for fun. Imagine scooping up some of those shares for less than $1?!
In either case, I hope the point here is that those who bought the S&P 500 at $1,500 or $750 don’t really care at this point. It is nearly $6,000.
No one is mad about that. But those who did buy the dip truly killed it.