By Kevin P. Brosious, CPA, PFS, CFP

According to a Motley Fool study, younger investors are becoming increasingly more fearful of the stock market. Only 37% of Gen Z and 55% of millennials own stocks, and some in the study believe owning Bitcoin is less risky than investing in the equity markets. I often meet with younger investors who have large cash positions but are afraid of investing in the stock market because they might “time it wrong,” like right before a substantial drop. But for younger investors, with a lifetime of contributions to make into their retirement savings, there really isn’t a bad time to start. In fact, any market corrections will help them attain their financial goals faster.

For example, suppose you invested $100,000 into an S&P 500 fund in December 2007. In 2008, systemic risk gripped the markets and the S&P 500 closed the year down 38%. You just lost $38,000. Talk about bad timing! Your plan had been to invest $20,000 every year going forward, but you wonder if you are throwing good money after bad.

Your adviser strongly suggests that you stay with the program since, when you look at it, everything is on sale.¹ After some deliberation, you decide that is the best course. The stock market returns for the six-year period (2008-2013) were -38%, 23%, 13%, 0%, 13%, and 30%, with annual dividends of about 1.8%.

At the end of 2013 you would have been rewarded for your courage: your portfolio would have grown to $334,000 with an annualized return of 10.2%.

But you still can’t seem to shake the worry, “What if it happens again!”

OK, let’s go down that path. Assume the next year your $334,000 portfolio loses 38% and your portfolio is now down to $207,000. Still, you soldier on. If you get the same order of returns and you continue your $20,000/year contributions, your portfolio would be worth $671,000 with an annualized return of 9% at the end of the 12 years. Not bad! You endured two once-in-a-lifetime stock market crashes, and you still made $331,000.

If the shock of potential losses still has a grip on you, consider if you never invested in the stock market and instead invested in risk-free Treasury bonds. Let’s see what your portfolio would be worth in this case. Treasury bonds (10-year) were paying 3.66% in 2008 and fell to 2.19% in 2020. The average over the period was 2.58%. Assuming your return was 3.66% for your initial $100,000 bond investment and you averaged 2.58% for your subsequent $20,000 annual contributions, your portfolio would be worth about $431,000 at the end of 12 years, $240,000 less than the S&P 500 performance.

The S&P 500 ended 2007 at 1,468 and closed at 1,848 in 2013. Assume instead of a crash in 2008, the market returned a comfortable, stress-free gain of 63.3 points a year from 2008 through 2013, closing at the same level (1,848) in 2013. You had a stress-free six years, but your portfolio would be worth $277,000 instead of $331,000. Your annual $20,000 investments only grew to $137,000 instead of the $190,000 in the original 2008 crash scenario. So, through 2012, the market drop produced a net benefit of $53,000 because you stuck with your investment plan and were able to buy cheaper shares when the market was down.

The average return of the S&P 500 for the past 50 years was 11.3%. Will it return that much in the future? Possibly, but don’t expect a smooth ride. A patient and disciplined investor will get rewarded for all those gut-wrenching corrections. Even for investors who no longer contribute to their portfolios, rebalancing can accomplish comparable results because you would be selling securities that are now overweight in your portfolios (bonds and cash) and buying stocks, which are underweight, which is the basic tenet of investing: buy low and sell high.

¹ Be fearful when others are greedy and be greedy when others are fearful – Warren Buffet

Kevin P. Brosious, CPA, PFS, CFP, is president of Wealth Management Inc., located in Allentown and Plymouth Meeting, Pa. He can be reached at kevin@wealthmanagement1.com.

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^{Statements of fact and opinion are the authors’ responsibility alone and do not imply an opinion on the part of the PICPA's officers or members. The information contained herein does not constitute accounting, legal, or professional advice. For actionable advice, you must engage or consult with a qualified professional.}