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.
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. Consider first a 15% daily drop which, at current levels for the Dow Jones Industrial Average DJIA, -0.52%, translates to a daily decline of around 4,000 points. According to the professors’ formula, there’s a 67% chance that such a drop will occur at some point over your 30-year retirement.
But the biggest impact of such a drop could very well be psychological, prompting some skittish retirees to go to cash. That could have terrible long-term consequences, of course, since the longer term performance of other asset classes is dismal. In the case of many segments of the bond market, for example, the expected return is negative in inflation-adjusted terms. So getting rid of equities could very well lead to a big drop in retirement spending.
That’s because of why crashes occur in the first place, according to Professor Gabaix. They take place, he explained to me in an interview, because there inevitably will be occasions when, for any of a number reasons, large institutional investors will simultaneously want to get out of stocks. And when they want to get out, they will find ways of doing so.
'crash', or correct?
Democratic historians economists just want huge tax increases and public transportation and for people to save money long term vs spending vs the reality people live pay check to pay check no matter what your income is it’s never enough in NYC, LA, Chicago, Miami, Dallas etc
Your Market will crash, if you are a: 'scared about everything' leftist Democrat.