Who Benefits From a Market Correction?

Jerry Seinfeld is the ultimate “it’s funny because it’s true” comedian. His night guy vs. morning guy slays because this is me all the time:

We all have competing ideas and beliefs in our heads on a regular basis.

Enjoying yourself in the present vs. delaying gratification for the future. Working hard vs. playing hard. Your career life vs. your family life. And so on.

Cognitive dissonance is the behavioral explanation that says our brain seeks to reduce the discomfort caused by two beliefs that are inconsistent with one another. Basically, one wins out, and it’s typically the easier route.

Think about the competition that goes on in the brain of anyone who currently owns stocks, but will be making retirement contributions for years or even decades into the future. On the one hand, we would all like to see the market value of our portfolio rise in an uninterrupted fashion. On the other hand, it would be nice to deploy current and future savings at lower prices.

In most cases, night guy wins this battle since people have a hard time dealing with immediate losses in exchange for delayed gains in the future.

The swift market sell-off we’ve experienced this week is painful for anyone in the stock market. Investments outside the U.S. have done even worse. Now is a good time to remind yourself that there’s a bright side to this pain.

To work through this dichotomy, here’s a list of those who would benefit the most from a continued stock market sell-off:

Millennials. Young people should get on their hands and knees to pray for a crash so they can buy stocks at lower prices, higher dividend yields, and lower valuations. This is easier said than done because young people have the least amount of experience dealing with the markets but the combination of low prices and decades of compounding is a powerful force when you’re young.

Anyone with a workplace retirement plan. According to the BLS, there are 160 million full and part-time employees in this country. Of that number, it’s estimated 54% participate in some sort of workplace retirement plan. By my calculations, that’s around 86 million people who make contributions on a regular basis.

IRA savers. This number isn’t quite as large but it’s estimated around 12% of the roughly 126 million U.S. households save in a traditional or Roth IRA.

529 savers. ICI estimates there are more than 13 million college 529 savings plans in the U.S. If you still have some time until your child goes to college, lower stock prices are your friend. (If you don’t have a lot of time but own a lot of stock for college savings, now is a good opportunity to reassess your asset allocation.)

Ok, really anyone who will be a net saver in the years to come. Buffett once wrote in a shareholder letter:

If you expect to be a net saver during the next five years, should you hope for a higher or lower stock market during that period? Many investors get this one wrong. Even though they are going to be net buyers of stocks for many years to come, they are elated when stock prices rise and depressed when they fall. In effect, they rejoice because prices have risen for the “hamburgers” they will soon be buying. This reaction makes no sense. Only those who will be sellers of equities in the near future should be happy at seeing stocks rise. Prospective purchasers should much prefer sinking prices.

This is one of the hardest parts about being an investor be in essence you’re rooting for your current holdings to drop in price to lower your average purchase price.

Pundits. There are pundits who have been calling for the world’s biggest crash every year since the beginning of the Obama administration. They’ve been so wrong I almost feel bad for them. Maybe the markets will throw them a bone and allow them to take a victory lap, even if it’s an undeserved one.

The financial media and bloggers. My friend Phil Pearlman likes to say, “The higher the VIX the higher the clicks.” Page views tend to increase when markets sell off because people start paying attention when things go bad.

Hedged strategies. These funds have to earn their fees at some point, right? I mean even if they do so by chance?

That co-worker of yours. You know the one. That co-worker of yours who told you in 2012 they were going to wait for a 10% correction until they put their 401(k) contributions back into the market. They’ll probably continue to sit in cash but at least a large correction would give them an opening to make a move.

Those with optionality. We’ve been hearing for a number of years now that cash offers investors optionality in the face of a declining market. There weren’t any opportunities to exercise that optionality in 2017 but 2018 is proving to be a different animal. Anyone holding cash or bonds who’s been waiting for a better entry point just may get it.

I still have a few decades ahead of me in terms of retirement and 529 savings. I know it would be beneficial to be able to invest in my periodic savings vehicles at lower prices but it’s still painful to see the value of my current holdings go down.

I am resigned to the fact that this is just how things work.

Further Reading:
Consistency & Self-Delusion

Now here’s what I’ve been reading lately:


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