Crashes, Cash and the Art of Long-term Investing
By Steve Vannelli
If you could choose what happens in the stock market tomorrow, would you prefer it to double or drop by two-thirds? For long-term investors, the choice may not be as obvious as it seems.
During a cyclical bull market like the one we have been in for the last five and half years, with stock markets making glorious all-time highs and valuations marching steadily higher, it’s easy to forget one of the most basic rules of investing: compounding of dividends trumps price appreciation over the long-term. This may seem counter-intuitive at first blush. Who wouldn’t prefer a doubling of the S&P 500 versus a two-thirds decline? In fact, for long-term investors and under certain conditions, a crash would produce a larger annual return over a 30-year horizon. In the charts and discussion below, we explain how that works.