A reader asks:
Please help settle a disagreement my friend and I are having: He says he’d rather the stock market only go down a little bit and then go up a steady amount every year during his working years because recovering from a 30% drawdown on your current portfolio would be difficult. I would rather buy shares on sale. I’d prefer the market be down 30% for the next 5 years, which will allow me to obtain shares at a discount. Then when I retire have the market rip for the next 10+ years. Can you help mathematically prove which scenario makes the most sense?
I love the fact that these friends are having stock market disagreements. These are my people.
This is a good question for the current environment too.
There have been 46 new all-time highs on the S&P 500 this year. The market keeps going up.
In 2022, there was just a single new all-time high on the first trading day of the year. From there, the market just kept going down.
So what’s the better scenario — investing with drawdowns early in your career or a steady state where things just keep going up?
It really depends on what stage you’re in of your investing lifecycle.
The current market environment is wonderful if you already own a bunch of financial assets. Baby boomers should love these new all-time highs because they’ve been invested for so long and are in or approaching retirement.
You don’t want drawdowns early in your retirement years because you don’t want to be forced to sell stocks while they are down. Sequence of return risk can be a problem if you have bad timing or not enough diversification to see you through an early rough patch in the withdrawal phase.
If you’re
