The Dow plunged 640 points today, the fourth largest point drop in history, and I couldn’t be happier. That’s right, I said happier! Of course, I am in a unique position to benefit long-term from the recent market’s turmoil. Let me explain:
I am 26 years old and have little assets. In other words, I have very little to lose. But the opportunity for long-term gains are astounding. Let’s use the S&P 500 as the benchmark for this example. If I began investing in July, 1932 (near the markets bottom during the great depression) and continued investing each month for the next 40 years, I would have earned a rough average of 13% on my investments.
However, If I had waited for the market to recover (5 years later) before beginning my 40 year investing habit, I would have only earned a fraction over 9%.
Even a 9% average return is amazing, but the difference 4% compounded over time makes is unbelievable. (Unless you are familiar with the magic like effects of compound interest.) To help illustrate my point, let’s use the same example from above. If I had waited the 5 years for the markets to recover and began investing $800 each month for 40 years, my investments would have grown to roughly $3,775,000. Not bad.
But if I had been able to ignore the masses and began investing near the market’s bottom, $800 dollars a month for 40 years would have grown into almost $13,000,000! That 4% adds up to just over a $9,000,000 difference over the span of my investment period!
So you may or may not wonder how this relates to my thoughts on today’s economy. No, I don’t think that we are in another Great Depression. The statistics say we are not. And yes, I know that we can’t necessarily use history as an indicator for the stock market’s future. But, I do believe in America’s economic/capitalistic ideals and that this bleak period will pass. I don’t know when, no one does. But I do know that 40 years from now, I’ll be glad that I took advantage of the opportunities available.
