Happy 30 Year Anniversary

Friday, October 20th, 2017

Do you know what yesterday was?

If you don’t: a) that’s a good sign, and b) there is a lesson for you going forward!

Yesterday, October 19, 2017 marked the 30th anniversary of the largest single day decline in stock prices.

On October 19, 1987, the Dow Jones Industrial Average fell 22.6%, and the S&P 500 fell 20.5% in one day.

Yes, you read that correctly. 22.6% in one day!

Imagine, at the end of any given day (not a month or a year), the value of your equity holdings dropping almost 23%.

To put a dollar value on that using nice round numbers, if the equity portion of your Retirement Bucket™ was valued at $2,000,000 on October 19, 1987, on the following morning, it was likely valued somewhere close to $1,548,000 assuming your holdings mirrored the Dow (unlikely, but useful for this discussion).

If evaluated in a vacuum without any historical perspective, it was not a very good day. There is no sugarcoating it.

However, as we have witnessed time and time again, despite what was reported at the time as the end of civilization, it had absolutely no negative impact on the rational, long term investor.

The Facts

Here are the facts on what has transpired since that day:

On October 19, 1987, the S&P 500 Index lost over 20% of its value and closed just under 225.

Yesterday, October 19, 2017, just shy of 30 years later, the S&P 500 closed at 2,562.

Do the math for a moment and you’ll discover that the value of the 500 largest companies in the United States increased more than ELEVEN times since then. And, this does not include dividends paid each year which averaged over 2% per year.

If you had reinvested your dividends, the value of your holdings would have increased more than FIFTEEN times.

What’s the Lesson?

There are many lessons to draw from this, but the biggest one is to internalize that market corrections and crashes are normal and temporary.

As we sit here today with market prices reaching all-time highs, it’s easier to buy into that fact and remain disciplined.

What’s critical is to prepare your mindset for the many corrections and crashes you will experience over the rest of your life.

When they occur, in an effort to capture your attention, you can count on the financial media to treat them as “different this time”, “bigger and more damaging than ever before”, and “permanent”.

They have been wrong every time before, and it’s highly, highly likely they will be wrong again.

For the rational, long term investor, market corrections and crashes have had no detrimental impact.

I Don’t Have Time to Make It Back

Lesson #2 is in response to those who wish to say, “but Jack, I’m getting up there in age. I understand what you’re saying about investing for the long term, but I don’t have time to make it back if we have another big correction like in 1987.”

The answer to that question is two-fold: First, you don’t want to keep 100% of your Retirement Bucket™ tied to the daily volatility of equities. We recommend holding 5 years’ worth of your anticipated withdrawals outside of equities, i.e. if you need to withdraw $7,500 per month from your Retirement Bucket™, that’s $90,000 per year or $450,000 over five years. This is in addition to the dividends you receive which buys you even more time. This allows you to invest for the long term with complete confidence that you will not have to sell during a temporary down market for needed cash flow.

Second, and even more important, here are the actuarial table facts on your longevity:

The average joint life expectancy of a 65-year old couple is 27.1 years, i.e. age 92.

The average joint life expectancy of a 70-year old couple is 22.6 years, i.e. age 93+.

The average joint life expectancy of an 80-year old couple is 14.5 years, i.e. age 94+.

Translation: you DO have time!

Let’s hope we don’t have to live through another individual day like October 19, 1987. But, if we do, fight like mad to avoid the masses and the financial media, and treat it like every other market correction in history.