This past week, I talked about what investors of different age groups ought to be thinking in light of the recent correction. Depending on where you are in life, your reaction to stock market drawdowns should differ if you’re in the right mindset.
In this morning’s Los Angeles Times I got a chance to stretch this concept out for a Q&A with reporter James Peltz…
How should investors view what’s happened lately?
If somebody is investing because they want to use the money a year from now, they’re making a mistake because in any given year you’re going to have 10% drawdowns. But if you have a 10-year time horizon, you have an 88% likelihood that the stock market is higher when those 10 years are up. That’s starting in any month of any year going back to 1926.
If you have a 20-year time horizon, it’s 100%. There are zero 20-year periods where the stock market is down from the month and year you started. If you understand that and then you’re talking to somebody who’s 35, you ask them, are you using this money in the next 10 years or 20 years?
When it comes to a 401(k), someone who’s 30 is not using the money for 35 years. Historically there is a 0% probability that their portfolio will be worth less. And it’s even better than that. The way in which they invest, if you’re young, is periodically adding to the portfolio.