The Upside To A Market Crash
Is a market crash good or bad for you?
Think I’ve fallen off my rocker for even asking? Well, consider this.
If you are saving for a long-term goal (such as financial freedom) and the market goes up in a straight line, will you earn less and less as you invest over time?
Yes - because you are buying at higher and higher levels.
If instead, the market suddenly drops 20%, aren’t you now buying the same quality investments at a discounted price?
Yes, you are.
Stock Prices and Company Value
Stock prices represent company “value” as determined by the markets. Because they are the result of that particular day’s trades, they aren’t always “correct.” Of course, we don’t know what the correct value is either – so don’t think I’m saying you can time the market. You can’t.
What I’m saying is that over long periods of time, stock prices will revolve around the true value of the underlying company. Sometimes, they will be over it and sometimes they will be under it. So, if you are in the savings/investing mode, would you rather stock prices today be over or under the true value of the companies you are buying?
Under, of course – and that’s exactly what a market crash represents!
Why Diversification Matters
This only works with a widely diversified portfolio of companies (think in the thousands, not in the hundreds), because individual companies may actually go out of business – but it’s unlikely that all of them will at the same time. This is why we only invest money we know we won’t need for many years.
We also invest in a portfolio with the right risk structure so we can reasonably expect the portfolio not to drop too far for our stomach to handle. The trick is to structure your portfolio to match your personal patience level so that you feel good buying stocks on sale when a crash occurs because you are highly confident you can fund your needs until the market recovers.
For those who have the patience to endure these declines, and the discipline to continue putting money to work as stocks go on sale, the best returns await!