Why Do These Investors Want Their Portfolios To Drop?
You might think thirty-six year old Steve Meade has a few screws loose. After all, if his portfolio dropped 20 percent this year, he might dance on his kitchen table. If it plunged again the following year, he might Salsa on his roof.
Photo: Steve Meade and his family
No, nobody hit Steve in the head with a hammer. According to Warren Buffett, Steve’s thinking is brilliant. Buffett says anyone who will be adding money to the markets for at least five more years should prefer to see stocks fall. “Once I understood how markets worked,” Steve says, “I began to enjoy seeing drops.”
Steve owns a globally diversified portfolio of index funds. For him, market drops are like low ocean tides. They are temporary. But they allow him to scoop additional ownership in thousands of companies with a lot less effort. It’s like plucking salmon or tuna from low tidal pools.
I began investing in 1989, when I was 19. If my portfolio dropped by $1 million over the next six months, I might join Steve dancing on his roof. That’s because I still have an income, so I can happily take advantage of falling prices. And when the markets recover, that’s when windfalls are made.
Thirty seven year old entrepreneur, Jonathan Schrier, understands how investing works. That’s why he was thrilled to see stocks fall in 2022. An investor since 2008, he adds regular sums to the markets. But the father of two children prefers to see stocks crash.
Photo: Jonathan Schrier
“Hopefully, Mr. Market feels like selling cheap again in the near future,” he says. “I’m always much more comfortable buying when everyone else is disgusted by the performance of the markets.”
Thirty-two year old Kathryn Taruc and her thirty-nine year old husband, Anton, would prefer to see their portfolio drop in value, too. Anton likens his stock market philosophy to discounted spirits. “A current hobby of mine is preparing cocktails for party guests,” he says. “I love it when I walk into my local store and see huge discounts on various spirits because I’m able to collect good bottles for future parties.”
Photo: Anton and Kathryn Taruc
But don’t wait for stocks to crash before buying in. Add money regularly, whenever you have it. And feel great (adding more, if you can) when stocks go on sale.
Retirees can’t benefit from stock market drops. But nor do they need to sweat. If they withdraw an annual, inflation-adjusted 3.5 percent or 4 percent per year, they can ride out market declines and not run out of money…as long as they don’t panic.
Thirty-five year old Nic and thirty-seven year old Court (they asked me not to include their last names) are two young retirees raising two children. Nic worked as a nurse and Court was an energy trader.
Photo: Nic, Court and their children
“The 4 percent rule is already quite conservative,” says Court. But if we see the markets take a dive, we are capable of adjusting some of our discretionary spending for the year, if need be. And I’m not talking about a lot. Just spending a few thousand a year less is likely all that would be needed to weather the storm.”
Imagine if you retired at one of the worst times in history: the year 2000. The US and global stock markets plunged 45 percent and 42 percent respectively from January 2000 to September 30, 2002. Less than six years later, the markets crashed again, dropping 52 percent and 48 percent from January 2008 to February 2009. And if that weren’t punishing enough, stocks plunged mid-year in 2020, during the COVID-19 pandemic. Then in 2022, a portfolio comprising 60 percent in global stocks and 40 percent in global bonds fell about 17.5 percent.
Plenty of retirees wet their pants and sold during drops. But those who stayed cool (think of Connery’s James Bond) would still have buckets of money left.
Assume you retired in 2000 with $1 million. It was allocated 60 percent to global stocks, and 40 percent global bonds. You withdrew an inflation adjusted 3.5 percent. After 23 years, you would have withdrawn a total of $1,071,439. That’s right. You would have withdrawn an amount that’s greater than what you had when you first retired. And by July 2023, you would have $1,267,767 remaining.
If you withdrew an inflation-adjusted 4 percent, you would have withdrawn $1,284,095 from your original $1 million over the same 23 years. And by July 2023, you would have $960,720 left.
So retirees shouldn’t worry when stocks drop. They just need a sustainable plan, a steady hand, and (if they do get nervous) an ability to withdraw slightly less during down market years.
As for the rest of us: let’s just keep adding money.
And if you pray for a market crash, well, I wouldn’t blame you.
The Year 2000 Would Have Been One of History’s Worst Years to Retire
Assume Retiring With $1 Million Dollars
(60% global stocks, 40% global bonds)
|Portfolio Value January 2000||Total Withdrawn By 2023||Portfolio Value July 31, 2023||Lowest Year End Value of Portfolio||Highest Year End Value of Portfolio|
Inflation-adjusted 3.5% withdrawals
Inflation-adjusted 4% withdrawals
Andrew Hallam is a Digital Nomad. He’s the bestselling author Balance: How to Invest and Spend for Happiness, Health and Wealth. He also wrote Millionaire Teacher and Millionaire Expat: How To Build Wealth Living Overseas
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