A Crash Course on Market Crashes

News Outlets Stock Market Predictions - Dave Kennon

Quick Market Update: The markets have been very volatile recently. It is no way will affect your long term financial health. Pay no attention. It is completely normal (and irrelevant).

A Crash Course on Market Crashes

Did you know that real people in real situations actually lost much less money during market “crashes” than the media reports?

I’ve been doing some historical digging and I’ve discovered some shocking truths. I hear a lot of horror stories about how much money people have lost during past crashes. You never know! You might be next! Get ready to live in a cardboard box!

The markets have had five significant crashes in the past 100 years.

The Great Depression (1929)
World War II (1939)
Oil Embargo/Nixon Resignation (1973)
The Dot Com/Technology Bubble (2000)
The Great Recession/Real Estate Bubble (2008)
It may come as a surprise to many of you that there were decades-long periods without any major ‘’corrections” in the markets. But I want to point out another interesting statistical curiosity.

Crashes typically cause short-term damage.
Allow me to explain through an analogy.

If you invested all of your money at the beginning of 1929 or 1940 or 1973 or 2000 or 2008, you would have had a bad time. But in the real world, you generally don’t suddenly invest all of your money at once. It is usually a gradual process as you save money and contribute to retirement accounts over the years. We need to look at the years preceding the crashes to get a true sense of how damaging they were to real people’s financial lives.

Let’s start with the years preceding the Great Depression.

1926: +11.6%

1927: +37.5%

1928: +43.6%

This means that if you had $100,000 invested in 1925, you saw it grow to $220,000 by the time the markets faltered. Over the next four years, your value dropped to $80,000. The markets then skyrocketed upwards again. By the end of 1936 your account was worth $241,000.

This means that over ten years (1925-1935) your investment in the S&P 500 would have increased from $100,000 to $241,000. That’s an increase of 141%.

This was during the worst downturn in the history of the stock market.

The World War II crash saw a similar phenomenon. From 1935-1945 (with the markets dropping significantly in 1937, 1940, and 1941) your $100,000 investment would have turned into $242,000. How?

1936 had a 34% return.

1938: 31%

1942: 20%

1943: 26%

1944: 20%

1945: 36%

Who cares if you had a few bad years in between?

The years preceding and following the crash in 1973-74? Same thing. If you invested money from 1970 to 1980 (with the markets dropping 40% during the downturn), your $100,000 turned into $170,000.

The years leading up the dot com bubble in the early 2000s is the best example of this concept. The 1990s was the best decade the markets have ever seen. Your $100,000 investment turned into a whopping $530,000 during the 90s. Did you lose 40% from 2000-2002? Yes. But you would have still been WAY ahead.

Lastly, the crash nearest and dearest to our hearts; the real estate bubble was possibly the worst economic event since the Great Depression. But the 37% lost in 2008 was mitigated by solid returns before and after. If you invested $100,000 in 2005, today it would be worth $327,000.

I think you get my point by now. Stock market crashes do not occur in a vacuum. We need to look at returns before and after to get a better understanding of the true cost of downturns.

What does all of this mean for you?

Keep calm and carry on.
What this means to you is that you can stop worrying. Turn off the financial news notifications on your phone. Change the channel from financial reporting. What is happening today in the stock market is not what will be happening a year from now.

Which means, if you are retired and have over $200,000 invested in a diversified portfolio of stocks and bonds right now — you can start spending the money the money is making.

Hmmm … let me say that again. Louder for those in the back this time.

You can start spending the money that your money is making!
Let your retirement savings turn into a machine that sends you a check each month. Back in the good ol’ days many workers received a pension when they retired in additional to social security. Since most of those plans are now gone, you need to turn your investment accounts into a sort of pension.

How do we do this? We spend 5% of the account value each year. Historically speaking, this kind of withdraw is a conservative assumption.

Even if there is a market “crash,” folks who plan for the long game are most likely going to be fine. So stop worrying and start living!

If you’re thinking to yourself right now, “Hmmm … that’s interesting. I’ll have to think about that.” Stop! The time for action is NOW. It starts with a retirement plan you can understand and believe in. Know how much money your money is making so you can decide how much you can spend.

Imagine: helping grandkids pay for college, financing that dream family vacation, helping to renovate your church, or investing in an exciting business opportunity. Retirement is supposed to be about living. This new mindset — the switch from saving to spending — makes it possible.

Here’s one more statistical fact for you: the older people get in this country, the more their net worth grows. Every study out there agrees on this fact. That means retirees die with more money in the bank than when they started retirement. Why? You can’t take it with you, so why not enjoy it while you can?

Kennon Financial is dedicated to helping you get the most life out of your money. If you want to go through the process yourself, give us a call.

Be Blessed,

Dave

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