How bad could it get for your 401(k)? Golie Mark

Probably the best argument for investing some more of our 401(k)s in the stock market right now is all the people telling us not to. As a general rule, it’s been a good time to be bullish when so many others are bearish.

And maybe the second best argument is the time of year. The “Halloween Effect” is a real thing. Nobody knows why, but stock markets have produced most of their gains during the winter months, from Oct. 31 to April 30.

But let’s play devil’s advocate and ask: Realistically, how bad could this bear market be? And I’m not talking about how bad it could be for short-term traders or someone looking for a quick profit. I’m thinking about what it might mean for retirement investors like you (and me) — people who are investing decades ahead?

Read: The limit for 401(k) contributions will jump nearly 10% in 2023, but it’s not always a good idea to max out your retirement investments

To get an idea I cracked the history books—or, more accurately, the history data compiled and maintained by Robert Shiller, professor of finance at Yale University (and a Nobel Prize winner). He has performance numbers on U.S. stocks going all the way back to the Grant administration.

And I ran some analysis based on the way more and more of us invest: Namely, by “dollar-cost averaging,” or throwing a modest (and equal) amount into the market every single month, come rain or shine.

Contrary to popular opinion, the worst time for a regular investor to get into the market was not just before the infamous crash of 1929.

Yes, the stock market collapsed then by nearly 90% over the next 4 years (in stages), or about 75% in real, inflation-adjusted terms when you include dividends. But oh boy did it bounce back fast. From the 1932 lows it doubled your money in a year and it quadrupled your money over 5 years.

Read: What to do with your cash if you’re retired or retiring soon

Someone who threw all of their money into the market at the worst possible moment, at the end of August 1929, was actually back in profit by 1936. And someone who dollar-cost averaged their way through the Crash of 1929 and the Great Depression, even assuming they started at absolutely the worst time possible, was in profit by the spring of 1933 and was up by about 50% by 1939.

But the really, really bad time for regular investors who dollar cost averaged was the 1960s and 1970s. Instead of a fast crash and bounce back, investors during those decades had a rolling disaster as stocks fell behind roaring inflation for the best part of 20 years.

Using Professor Shiller’s data, I ran a simple analysis of what would have happened to a dollar-cost average who started in 1964 and kept going for decades.

You can see the result above.

It isn’t pretty. That shows the cumulative “real” return on investment, meaning the return after adjusting for inflation, for someone who kept putting the same amount into the S&P 500 every month. (Oh, and we’re ignoring fees and taxes.)


Could this happen again? Sure. Anything could happen. Is it likely? Probably not.

This is the worst case scenario on record. I am playing devil’s advocate.

Actually the median real return on the S&P 500

over 30 years is just under 7%.

There are two caveats to bear in mind.

First, this is in “real” terms. What the chart reveals is that, apart from a brief plunge 1970 and a rocky period in the mid-1970s, a stock portfolio roughly kept up with runaway inflation even through these absolutely abysmal decades. You didn’t get ahead of the 8 ball but you didn’t fall behind it. Small comfort, certainly, but worth a mention.

Second, the long, lean years were then extravagantly compensated by the boom after 1982. Someone who started investing for their retirement in 1964 and didn’t retire until the mid-1980s made a total gain on their investment of about 50% in real, purchasing-power terms. Someone who invested over 30 years more than doubled their money.

The good news about bear markets, even long bear markets, is that if we keep on investing during them we pick up stocks on the cheap.

That money invested in the S&P 500 during the mid-1970s? Over the next 20 years it beat inflation by a staggering 700%.

“Even if investors are caught in the worst possible time in history, by continuing to invest, they are constantly averaging down — they are increasing their return in the long run,” says Joachim Klement, investment strategist at Liberum. “They say compounding interest is the eighth wonder of the world. I would say dollar-cost averaging is the ninth.”

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Written by moz

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