Well the stock market's taken a bit of a turn for the worse this past week, isn't it?
Hey everyone, Daniel here and welcome to Next Level Life a channel where you can learn about
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Well I didn't initially plan to do this video this week but seeing as the market kind of
took a bit of a tumble at the end of the week losing about 5% of its value according to
the S&P 500 in the last couple of days I figured it's probably a good time to upload this video.
So it is March 25th, 2018 as I'm recording the audio for this video and from March 21st
to March 23rd the market dropped from about $2,720 down to about $2,590 a loss of about
5% in the span of two days.
And with things like possible trade wars being all over the news lately one has to wonder
if the market is about to collapse?
Well as I’ve mentioned many, many, many times on this channel and as I will mention
many more times as we go along I have no idea what the market’s going to do next.
Nobody truly does.
But if the market does crash I thought it'd be a good idea to look now, before it happens,
and see during a market crash how much of a difference can you make in your net worth
by continuing to invest?
So in this video, I'm going to give you a bit of a crash course in the stock market...
Crashes and go through the most notable Market crashes since the 1950s using data from the
S&P 500 as a barometer and talk about how much the market dropped and how long it took
the market to recover.
Then at the end of the video I'm going to compare and contrast the differences in net
worths of someone who pulled out of the market during large crashes, someone who decided
to stop investing during crashes but did not sell their Investments that they already had,
someone who continued to invest like normal during large crashes, and finally someone
who starts to invest even more when the market is going down.
Let's get started.
Alright one last thing I want to mention before I actually get into the crashes themselves
is that I understand that crashes can be very bad in more ways than just seeing your investment
values going down.
The unfortunate fact is that a lot of people lose their jobs when the market crashes, so
all of the stuff that I go through in this video today is only going to be valid if you
can keep an income coming into the household during the crash.
So first I'll start with the smaller crashes which in my opinion should probably really
be called Corrections.
In December of 1952, the S&P 500 peaked at $26.57 over the next several months it dropped
to a low of $23.32 in August of 1953.
That was a drop of a little over 12%.
A few months later it would recover and break its original peak of $26.57 closing at $26.94
in March of 1954.
Meaning that it took 1 year and 3 months for the market to go from the First peak all the
way to the point where the market fully recovered and set a new high.
In July of 1956, the S&P 500 peaked at $49.39 over the next several months it dropped to
a low of $39.99 in December of 1957.
That was a drop of 19%.
A few months later it would recover and break its original peak of $49.39 closing at $50.06
in September of 1958.
Meaning that it took 2 years and 2 months for the market to go from the First peak all
the way to the point where the market fully recovered and set a new high.
In July of 1959, the S&P 500 peaked at $60.51 over the next several months it dropped to
a low of $53.39 in October of 1960.
That was a drop of a little under 12%.
A few months later it would recover and break its original peak of $60.51 closing at $61.78
in January of 1961.
Meaning that it took 1 year and 6 months for the market to go from the First peak all the
way to the point where the market fully recovered and set a new high.
In December of 1961, the S&P 500 peaked at $71.55 over the next several months it dropped
to a low of $54.75 in June of 1962.
That was a drop of a little over 23%.
A few months later it would recover and break its original peak of $71.55 closing at $72.50
in August of 1963.
Meaning that it took 1 year and 8 months for the market to go from the First peak all the
way to the point where the market fully recovered and set a new high.
In January of 1966, the S&P 500 peaked at $92.88 over the next several months it dropped
to a low of $76.56 in September of 1966.
That was a drop of a little over 17%.
A few months later it would recover and break its original peak of $92.88 closing at $94.01
in April of 1967.
Meaning that it took 1 year and 3 months for the market to go from the First peak all the
way to the point where the market fully recovered and set a new high.
In November of 1968, the S&P 500 peaked at $108.37 over the next several months it dropped
to a low of $72.72 in June of 1970.
That was a drop of a little under 33%.
A few months later it would recover and break its original peak of $108.37 closing at $109.53
in May of 1972.
Meaning that it took 3 years and 6 months for the market to go from the First peak all
the way to the point where the market fully recovered and set a new high.
In December of 1972, the S&P 500 peaked at $118.05 over the next several months it dropped
to a low of $63.54 in September of 1974.
That was a drop of a little over 46%.
A few months later it would recover and break its original peak of $118.05 closing at $121.67
in July 1980.
Meaning that it took 7 years and 7 months for the market to go from the First peak all
the way to the point where the market fully recovered and set a new high.
In March of 1981, the S&P 500 peaked at $136.00 over the next several months it dropped to
a low of $107.09 in July of 1982.
That was a drop of a little over 21%.
A few months later it would recover and break its original peak of $136.00 closing at $138.53
in November of 1982.
Meaning that it took 1 year and 8 months for the market to go from the First peak all the
way to the point where the market fully recovered and set a new high.
In August of 1987, the S&P 500 peaked at $329.80 over the next several months it dropped to
a low of $230.30 in November of 1987.
That was a drop of a little over 30%.
A few months later it would recover and break its original peak of $329.80 closing at $346.08
in July of 1989.
Meaning that it took 1 year and 11 months for the market to go from the First peak all
the way to the point where the market fully recovered and set a new high.
In May of 1990, the S&P 500 peaked at $361.23 over the next several months it dropped to
a low of $304.00 in October of 1990.
That was a drop of a little under 16%.
A few months later it would recover and break its original peak of $361.23 closing at $367.07
in February of 1991.
Meaning that it took 8 months for the market to go from the First peak all the way to the
point where the market fully recovered and set a new high.
In August of 2000, the S&P 500 peaked at $1517.68 over the next several months it dropped to
a low of $815.28 in September of 2002.
That was a drop of a little over 46%.
A few months later it would recover and break its original peak of $1517.68 closing at $1526.75
in September of 2007.
Meaning that it took 7 years and 1 months for the market to go from the First peak all
the way to the point where the market fully recovered and set a new high.
In October of 2007, the S&P 500 peaked at $1549.38 over the next several months it dropped
to a low of $735.09 in February of 2009.
That was a drop of a little over 52%.
A few months later it would recover and break its original peak of $1549.38 closing at $1569.19
in March of 2013.
Meaning that it took 5 years and 5 months for the market to go from the First peak all
the way to the point where the market fully recovered and set a new high.
In May of 2015, the S&P 500 peaked at $2107.39 over the next several months it dropped to
a low of $1920.03 in September of 2015.
That was a drop of a little under 9%.
A few months later it would recover and break its original peak of $2107.39 closing at $2173.60
in July of 2016.
Meaning that it took 1 year and 2 months for the market to go from the First peak all the
way to the point where the market fully recovered and set a new high.
All right with that out of the way let's get to the comparison.
Now obviously most people aren't going to work for 70 years, the human body just could
not sustain it, so I won't be using the data from 1950 to today instead I'm going to be
using the data from January of 1978 to the end of December 2017 so that 40 year period.
In all four cases, I'm going to assume that each person invests $100 a month.
Let's see how their net worths change depending on how they handle Market crashes.
I'll start with Joe.
Joe is a little bit more nervous during Market crashes and tends to panic a little bit more
than he would like to admit and as a result, he sells his Investments when the market is
bottoming out.
Now is that a little bit unrealistic that he would sell off his investments at the low
point of the market every time?
Yeah, I admit it is a little bit unrealistic, but this is just for an example to illustrate
the differences in your net worth depending on how you handle Market crashes.
So Joe starts off in 1978 confidently investing $100 a month.
The market starts to go down in March of 1981 but he continues investing, figuring that
it will come back eventually.
However, eventually, it gets to be so bad that he can't take it anymore.
He loses his faith in the market in July of 1982 and completely sells his way out of the
market.
He regains his confidence in the market in November of 1982 when the market sets a new
high and that's when he buys back in.
Now, remember between March of 1981 and July of 1982 the market dropped about 21%.
By the time that it hit its low point Joe's net worth was $5,250 so that's what he got
when he sold his stock and that's also, for the sake of convenience, what he puts in,
in November of 1982.
This pattern continues with Joe continuing to invest as the market begins to go down
but then panicking when it hits its low, selling off his investments before getting back in
after the market hits its new high.
At which point he reinvests everything that he made from selling his stocks when the market
was low.
This means that over the course of 40 years he put over $178,000 into the market.
Now that number does include the amount they put in after selling his stocks so it is a
little bit misleading.
If we were to just look at the amount of money he put in with his hundred dollars a month
investments it would come out to be $32,700 over the course of 40 years.
His total net worth at the end of 40 years is $46,014.16.
Now let's take a look at Betty.
Betty is a little bit more confident in the market than Joe but not quite enough to continue
investing as it's going down.
However, unlike Joe, she does not sell out of the market at any point.
She will invest $100 a month just like Joe until the market starts dropping.
Once it starts dropping she will stay invested but won't continue to put more money into
the market and similar to Joe she will begin investing again once the market sets a new
high.
Over the same 40-year period as Joe, she will invest $26,800 of her own money into the market
and wind up with a net worth of $258,449.67.
That is over five times as much as what Joe ended up with!
So clearly at least over the last 40 years, it is much much better to stay invested in
the market even if you don't continue contributing during Market downturns than it is to sell
off when the market is dropping.
And I'm sure that we all already knew that but it is nice to have numbers put to it.
Next, let’s take a look at Charlie.
Charlie is fairly confident in the Market's long-term potential and he
continues to invest $100 a month every month no matter what the market is doing.
This means that over the course of 40 years he will have put $48,000 of his
own money into the market.
And since he never stopped investing or sold his stocks he would have a network after 40
years of $370,424.37.
That is over $110,000 more than Betty despite the fact that he only put in about $21,000
more of his own money over the same period of time.
Lastly, let's look at Jane.
Jane has an unwavering faith in the stock market's long-term potential and not only
does she keep investing at least $100 a month no matter what the market is doing but when
the market starts dropping she doubles down and invests an extra $50 a month during the
drop and continues to invest that extra $50 a month all the way until the market hits
a new high.
At that point, she goes back to investing just her regular $100 a month.
In doing this Jane will end up with a net worth of $426,411.71.
That is an extra $56,000 more than Charlie, it's nearly $170,000 more than Betty and it
is almost 10 times the amount that Joe ended up with over the same period of time.
Now Jane did invest the most out of any of the four, putting $58,600 of her own money
into the market over the course of 40 years, but with that extra $10,600 that she invested
in comparison to Charlie she ended up with an extra $56,000 in her net worth.
Meaning that those extra $10,600 earned her roughly $5.28 per $1 invested.
In case you are curious, I get that number by
taking Jane’s net worth - Charlie's net worth divided by the difference between Jane's
$58,600 of Investments minus Charlie's $48,000 of Investments.
The ratio is about the same when you compare Jane’s Investments to Betty's Investments
and running the same calculation Jane earns about $14.69 per extra $1 invested when compared
to Joe.
So you can see how big of a difference changing the way you look at stock market crashes and
corrections can make in your net worth over time.
It can be a huge difference.
However, as I said earlier in the video crashes and market corrections are an opportunity
as long as you can keep income coming into the house.
However, I do want to say that just because you can noticeably increase your net worth
by shoveling as much money as you can into the market when it's going down that doesn't
always mean that you should.
For example, if you're up to your eyeballs in debt you may want to consider putting the
money, especially during a market crash, towards paying off your debt and lowering your month-to-month
living expenses.
Because who knows you may end up having to look for a new job at some point during the
crash.
Even if you're doing really good work at your company, sometimes they have to downsize as
the market Falls, so you may be laid off at least temporarily and that should always be
taken into consideration.
As always consult with a financial professional when making these decisions.
But that'll do it for me today once again if you enjoyed this video be sure to subscribe
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