11 March 2020


By Raul Elizalde

This article also appeared on forbes.com

Straight to the point: Millenial investors should not fear, but rather embrace, a big market collapse. A crash will be the best thing that can happen to their investment success.

This is not about any kind of “lesson” that they may learn from the current market upheaval. This is about looking at a good entry point for a 15-20 year investment horizon.

Of course, a big decline would have a very negative impact on older investors because they have less time to recover from big losses.

That’s a big reason why investment strategies must be increasingly focused on managing risk as an investor ages. Smoothing out peaks and valleys goes a long way not only to prevent losses from which it takes long to recover, but also to minimize the emotional decision-making caused by the panic triggered at seeing one’s savings evaporate.

A market crash can also have bad consequences for millenials if it spills through the economy and cuts into job opportunities. There are few things more crucial for future financial success than starting saving money early.

But strictly from an investment standpoint the best opportunities to make money in the long term show up when most people are running away from stocks.

Warren Buffett has been quoted with a similar advice: be fearful when others are greedy and greedy when others are fearful. This might not be great advice for those who don’t have many investment years ahead, but it is excellent advice for younger investors. A look at history shows why.

We looked at past times of maximum pessimism and compared them with an S&P 500 proxy developed by prof. Robert Shiller of Yale University that goes back to 1874. It was clear that the best 15-year real total returns (i.e. after inflation) started precisely when people were most fearful.

source: Path Financial LLC

Conversely, the worst 15-year returns started when optimism was at its highest.

source: Path Financial LLC

Where are we today? Up until mid-February, when the bull market seemed to be running in all cylinders, the outlook for 15-year returns seemed inauspicious in context with the historical results outlined above. For millenials, the 20% or so decline from the peak so far makes it much more palatable to place long-term bets, but the chart below suggests that past drops have been considerably steeper.

source: Path Financial LLC

Right now might be a good time to buy stocks for those who have 15 years or more ahead. It does not seem unlikely that even better entry points for long-term investing might be available in the not-too-distant future.

Questions? Talk to us.