Why I’m Rooting for a Massive Stock Collapse…and You Should Too
Investing is the only business I know that when things go on sale, people run out of the store -- Mark Yusko
What I’m hoping for is a significant market sell-off, greater than 20%.
Before you accuse me of being insane or a doomsday prepper hoping for a Fight Club-type financial system meltdown[i], hear me out.
In fact, unless you’re in the distribution phase of your investing lifecycle[ii] you should feel the same way.
To prove my point, some historical perspective is needed.
Since 1928, there have been:
· 24 down years (returns less than 0%)
· Six years with returns less than -20%.
· One four-year streak and two three-year streaks of negative returns.
· 66 up years (returns greater than 0%)
· 32 years with returns greater than 20%.
· Two streaks of 9 years of positive returns (including now)
· The average nominal return for the S&P 500 is approximately 7%.
Let’s concentrate on the bolded point: Approximately 7% of the time the market is going to produce losses greater than 20%. I think that qualifies as a significant and rare event.
More importantly, here’s what happened to stocks in the decade following a significant sell-off, in chart form:
Data Source: Aswath Damodaran. Year signifies year of decline, investment starts Jan 1 of following year. Chart signifies the return of $1 invested by yearly return.
In the decade following an annual decrease of greater than 20%:
· The median annual return was 8%; 100 basis points greater than historical.
· The average annual return during these periods was approximately 9%; 200 basis points greater than historical.
· At no period was the 10-year return negative during this event.
· At two periods, including the current[iii], annual returns more than doubled the annual historical return.
· Only during two periods did the average annual return trail the historical return.[iv]
Ask yourself, are you more likely to be a net buyer or a net seller of stocks in the next decade? Not only is it likely you’re going to be a net buyer of stocks, but you’re most likely going to enter your high-earning years and purchase more than you have previously. A large sell-off makes stocks cheaper for you in the years to come and increases the chance the next decade will produce positive returns.
The key here is to not run out of the store and snap up equities while they're on sale.
[i] I’m blocked by Zerohedge, so I’m pretty sure I’m not.
[iii] There has only been nine years since 2009, the year after 2008’s <-20% performance.
[iv] Ever heard of the Great Depression? 1930 and 1931 were those years, making it a special case in my opinion.