Why Most Investors Should Hope To See Stocks Fall

I’m 48 years old.  I have an income. I also have a few million dollars in the stock market. 

And I would like to see stocks fall further this year. 

I would like to see them fall next year too.

If I’m really lucky, stocks will fall hard three years in a row.  If you’re relatively young, and you have an income, you should hope for much the same.  

I regularly hammered this concept home in my book, Millionaire Teacher (2011, 2017).  I worked hard to convey this concept in The Global Expatriate’s Guide To Investing (2014) and in Millionaire Expat (2018).  

Below, I’ve pasted an article that I wrote for the Globe and Mail a couple of years ago.  If you’re young, and you’re upset that stock have dropped, you’re cheering for the wrong team.

Why Too Many Investors Cheer For The Wrong Team

Al McColl is a die-hard Toronto Maple Leafs fan.  When his kids were younger he used to put them in his favorite team’s sweaters every time the Leafs played. 

On October 12th, Mr. McColl watched Auston Matthews score four goals against the Ottawa Senators in his first NHL game.  Then he watched in horror as the Leafs lost in overtime.  Senators fans where thrilled.  But Leafs’ fans were gutted.  That’s why it would have been strange if the next morning’s headlines read, “Hockey Fans in Canada Celebrate As Senators Take Down Leafs!”  Not everyone is going to support the same team.  

That should be the case with the stock market too.  Headlines shouldn’t say, “Investors Win As Stocks Rise!” Only retirees (and near-retirees) should be thrilled to see stocks rise.

I like to see stocks fall. Most Canadians should too.

Most Canadians?  That’s right. Statistics Canada says about 71 per cent of Canadians are between the ages of 20 and 60.  That’s a large majority.  Most of these investors should be adding money to the stock market every month.  They should hope that stocks don’t rise for several years in a row.  That’s because, long term, stock market growth tracks corporate earnings’ growth.  On aggregate, business earnings grow almost every year.  When stocks don’t follow, investors get to buy an increasingly higher percentage of corporate earnings with their savings and enjoy higher dividend yields.

This is great for workers who are adding money to the market.  It’s like piling projectiles onto an ancient catapult.  The more money that they add, while the catapult is low, the more money they’ll make when the catapult launches.  That’s why Warren Buffett says those who have at least five more years to work and invest should prefer to see stocks sink.  About 28.4 million Canadians are over the age of twenty.   Of that number, about 71 per cent are below the age of sixty.  That means most working Canadians should prefer to see stocks sputter. 

But so far this year, Canadian stocks have gained about 18 per cent.  Only retirees, or near-retirees, should be pleased to see that gain.  Statistics Canada says the average retirement age in 2015 was 64 years of age.  Just 29 per cent of adult Canadians (over the age of twenty) are sixty years of age or older.  This minority should be cheering. After all, workers are buying more expensive shares.  Retirees are selling.  

Miranda McIndoe manages a GoodLife Fitness gym in Victoria, B.C.  She’s ready to invest.  She knows that if she invests her money every month, she’ll benefit from dollar cost averaging.  During months or years when the stock market lags, her regular deposits will buy more market units.  She wants to stack that catapult.

Let’s use Ms. McIndoe to dramatize a point. Assume that she invests $10,000 a year.  Should she prefer to see stocks gain 15 per cent per year for 15 years, followed by 2 per cent annual gains for an equal time period?  Or should she prefer to see stocks gain 2 percent per year for her first 15 years of investing, followed by 11 per cent per year for the following 15 years?

I asked Ms. McIndoe.  “I think most new investors would want to see their money rise right away,” she said.  “But because you’ve asked me, it might be a trick.”  

Miranda McIndoe is right.  Compounding math has a way of fooling people. If her money grew by 15 per cent per year for 15 years, followed by 2 per cent per year for the next 15 years, she would have a total of $922,817.99.  That’s a lot of money. But if her money grew by 2 percent per year for 15 years, followed by 11 per cent per year for an equal time period, she would end up with $1,235,866.87.

How about a constant return of 7 percent per year? It would be easier on the nerves.  It also looks better than facing weak stock returns for the first 15 years. But looks are overrated.  In this scenario, the money would grow to $1,020,730.41.  Facing the first 15 years of horrible returns, followed by 11 percent per year growth for the next 15 years would provide $215,136.46 more.

That’s why I grumble when my investments rise in value.  Like Ms. McIndoe, I’m not retired.  Most of my friends aren’t retired.  We’re part of an age group that should invest every month.  It would be cool to see a headline that respects our interest. 

Like hockey, not everybody in the game should cheer for the same team.

Image modified from Pixabay