Stock Market Crashes Aren’t Good for Anybody

Ben Carlson at the A Wealth of Common Sense blog wrote a nice article on how stock market crashes and poor performance aren’t necessarily bad, especially if you are young.

The gist of it is that millennials have many years to go until retirement, and a crash or low return environment now gives them an opportunity to buy shares cheaply now, with the expectation that stocks will resume fair returns for the unforeseeable future.

Woe to anyone already close to retirement and fully invested in stocks if there is crash now, but that’s not Ben’s concern in the article.

However, I would like to take exception with the idea that crashes and low current returns are really any good for anybody, even millennials with a lifetime of investing ahead of them.

1. Millennials cover a fairly large age range, but if you are 30, there is a good chance that you (or your parents in your name) have already put together a decent nest egg. If that 30 year old sees his account crash from $50,000 to $30,000 (which happened in 2008) it will take a number of years to work back up $50K. As they say, a 40% drop needs a 67% increase to back to even. Years of earnings spent getting back to even in the hope there isn’t another crash around the corner.
2. Crashes don’t happen in a vacuum. Stock crashes or moderate declines are often accompanied by recessions, which result in layoffs. Many of those junior workers are likely to be the first ones whose jobs are eliminated. (As we say in the accounting business, LIFO, or last in, first out.) Difficult to maintain those 401(k) deposits if you don’t have a job. Well, really, impossible since 401(k)s are job specific.
3. And if our fine young millennial has been able to start a family and scrape enough money for a house? We know what happened to house prices in the last recession. Yes, you never know what the fallout of a crash is going to be, but chances are it’s not going to be good.
4. Lastly, there’s the psychological impact of a crash. The theory is that you benefit by continuing to put money to work at the darkest times. But, in reality, hardly anybody does that. Our Great Depression era grandparents or great grandparents never trusted the markets or banks again. It took many years for regular folk to get back in the markets after 2008 and studies still say participation is at historic lows.

Under the most perfect situation, a crash might help a few people. But, for most everyone, crashes and years of underperformance devastate savings and lives.  Don’t wish them on anyone.