What would a stock market crash during your golden years do to your retirement?
Don’t trouble yourself with worry-filled what-if thoughts anymore.
Mark Hulbert, of MarketWatch, explains:
While few retirees or soon-to-be retirees ever stop to ask that question, they should—unless their equity exposure is so low that a crash wouldn’t materially impact their retirement financial plan. So for this column, I’m using the 32nd anniversary of the 1987 crash—which was officially “celebrated” on Oct. 19—to ask the question for you.
Many dismiss the 1987 crash, the worst in U.S. stock market history, as a one-off event—with no historical relevance. They furthermore add that, even if the market were otherwise wanting to crash, government safeguards that were put in place in recent years would prevent it from doing so. As you will see, I will argue that both of these arguments are wrong.
In making that bold assertion, I rely heavily on a study conducted a number of years ago called “Institutional Investors and Stock Market Volatility,” by Xavier Gabaix, a finance professor at Harvard University, and three scientists at Boston University’s Center for Polymer Studies: H. Eugene Stanley; Parameswaran Gopikrishnan, and Vasiliki Plerou. They came up with a formula that predicts the frequency of stock market crashes over long periods of time.
I’ll get to their formula in a minute, but notice that—if they’re right—crashes are inevitable. We therefore are kidding ourselves if we think crashes are one-off events that will never reappear.
Keep reading at MarketWatch.