A Brief Bubble Update

When I made the video I didn't realize that Ford was the actual bubble company.

Thirtysomethings: the crash is good for your 401k

The stock market crash is on everyone's minds right now as they watch their retirement savings dwindle by almost half. A lot of folks approaching retirement are really hurting and I don't mean to diminish the seriousness of their situation.

Still, for those of us with a long way until retirement, this crash will help you over the long run. Over a period any problems we have near term will be distant memories. Crash or no crash, the stock market will likely reach the same level in twenty or thirty years.

Let's say this is you:

• 34 years old
• $50,000 worth of stock in your 401k invested in an S&P 500 index account
  
• You continue contributing every year going forward until retirement at the maximum
  

Consider two scenarios:

1. No crash. Stocks increase slowly but steadily (say, ~6% a year) from last year's highs over the twenty six years until your retirement.
   
2. Crash. Your 401k takes a 50% hit this year, and you feel poorer. But after that, you see higher returns (say, ~9% a year) for the next twenty six years.
   

In both scenarios, the price of the S&P 500 index at your retirement is the same.

Here's how your 401k grows over time:


Because of the crash of 2008, you'll have almost 50% more in your account. Look how small the crash looks after twenty six years.

The numbers I've picked for this example are arbitrary, and certainly the rate of growth of the stock market won't be steady over time, but the message is true regardless: you're now going to be investing a lot more money at better values than you would have, and over time, the stock market will achieve the same level regardless of what happens this year.

Disclaimer: The information on this site is provided for discussion purposes only, and are not investing recommendations. Under no circumstances does this information represent a recommendation to buy or sell securities.