A 30-Year Stock Market Crash? Yes Please!
The other day I came across another article reminding us of how retiring baby boomers are sure to be selling stocks for a long time to come, possibly driving prices down. I scanned it quickly to see if it had any actual new evidence but apart from mentioning a Federal Reserve study it was the same as usual.
What if the worst comes to pass and the stock market actually declines for 20 to 30 years, or crashes and stays flat for that long? That would be a big win for me! To clarify that, I don’t plan to hold anything back from my investments and may be taking income periodically from my portfolio well before 30 years from now. So it’s not just that it would be a better price to buy at. But this could still be a good thing. Why is that?
Imagine a broad market index with a dividend yield over 5%. Imagine that you get paid in cash every month for holding hundreds of stocks without having to analyze them. Not only that, but you can re-invest it (when you aren’t taking the income) to buy more of the same stocks with the same dividend, giving you compounding income that you can see every month. I would imagine the earnings yield would still be well above the dividends, which would lead to good appreciation potential once buyers overpowered sellers again. This sounds like a dream, being able to really invest and not “send out distress signals and scan the horizon for Ben Bernanke”, as another article this week put it.
There are a number of reliable sources pointing out the potential downward pressures of the boomer effect, although there are many others who point to reasons it may not affect the market. Two of the main reasons given are that with long retirements and large portfolios baby boomers will be keeping their stocks for a long time and even leaving some as inheritances, while at the same time growing young investor classes in emerging markets will be buying more of our assets. The first reason does make sense and many could slow down their spending if they can’t all sell their stocks at once. The second reason will likely take longer to play out than some people expect, but could eventually be a force.
The market could go down, which would be good, and it could go up, which would be good. The news reports, focused on repeating the experience of 1985-2000 without thinking about why it happened, often ignore a lot of real opportunities. Eventually they will report on what’s successful in the new market 20 years after it happens. I’m not saying that investing in stocks can’t fail. If they stay at their current levels for 30 years that might be the worst outcome. But as long as the business environment continues to improve there is a lot of potential regardless of where the market mood swings may go in 30 days or 30 years.