The second quarter has come to a close with the stock market roughly 10% below the highest levels reached in April. With apologies to retirees living off their investments, the rest of us can celebrate. We’re going to benefit from the decline. At least, we will if we keep our heads.
Think of it this way. We have no way of knowing what the stock market’s level is going to be on that blessed day years from now when you need to take money out of your retirement savings. That’s going to depend on things we can’t begin to predict: the state of the economy, the mood of investors, and any number of horrible or beautiful things that might be happening in that distant future. One thing it doesn’t depend on is today’s stock market level. Ten years from now (to choose one arbitrary date), the market will be priced according to what’s going on then, without regard to how that number compares with today’s market level. A higher or lower Dow today won’t affect where the Dow is ten years from now.
To pick a number out of the air, let’s assume the Dow will be at 24,000 on that future date. Consider which of these futures you would prefer to see:
- Stocks languish at today’s levels for years, or even decline further, before heading upward, or
- Stocks zoom upward now, creating most of that growth over the next few years.
If stock prices stay low, any money you add to your savings can be used to buy more shares than if stock prices are higher. We all seem to understand that it’s better to buy milk or gas at lower prices, but complain when we have the opportunity to buy stocks at lower prices. For people who are still saving, lower stock prices are a huge advantage.
What if you aren’t able to add to your savings? You can benefit from the lower stock prices in two ways. One is rebalancing. If you keep your portfolio divided between stocks and bonds, the decline in stock prices will have reduced the percentage of your portfolio devoted to stocks. Restoring that percentage will involve selling bonds and buying stocks — and that means you’re buying stocks at a lower price.
You can benefit even without rebalancing. Companies generally don’t determine the amount of dividend they’re paying according to the stock price. When stock prices are lower, dividend yields are higher, and you’re able to buy more shares with the reinvested dividends.
Folks who are forced to sell at lower prices because they’re living off their retirement savings have good reason to be unhappy with the stock market’s decline. The rest of us should be pleased with the opportunity these lower prices offer.
Of course you can only benefit from this decrease in stock prices if you have the discipline to stick with a sensible asset allocation. If you get discouraged with stocks and bail out, as so many did early in 2009, you won’t benefit from the low prices. The rewards are there for those who maintain their stock investments throughout a decline. Try not to celebrate too loudly when the market goes down, because some people will suffer genuine losses. But there’s no need for gloom. For most of us, a stock market decline is an opportunity, not a disaster.
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