Millennials Should Want a 20 Year Bear Market


It’s simple math

The reason is simple. If you are young, you are probably a net buyer of stocks, whereas older people are usually net sellers of stock as they get closer to retirement. But as stocks go up, you are effectively spending more and buying less of the same thing – which means your long-term returns will inevitably be lower.

Let’s say you plan to put 250 dollars a month into the S&P 500 for 30 years. If you started to invest at the beginning of 2020, then today your investment is probably worth 30-50% more than what you paid for. That’s great, but it’s unfortunately just half the picture. You also have to keep in mind that today you’re also buying 30-50% fewer shares than you were buying back then, which is what ultimately matters at retirement. Today, you’d spend a lot more for the same amount of shares, even though you’re effectively buying the same businesses. You’re just paying them more — both in terms of dollars, and in terms of valuation premium.

And the problem is that the higher the price, the lower the return you can expect. This is good for sellers (retirees) but not great if you have to keep buying more, like most young investors.

This is why I say that millennials should hope for a very long bear market to come. Those would be the best circumstances for a person in their 20s or 30s to invest in, since it would be the best time to accumulate stocks. If the S&P 500 goes nowhere for 10 or even 20 years, as it has happened in the past, then you have up to two decades to accumulate in peace and reinvest the dividends for cheap.

Think of it like a discount: you have one to two hundred paychecks worth of money to invest at a cheap price. It might be hard to look at psychologically when you open your broker, but that’s just how investing works.

And then, once the bear market ends and a new bull run starts, well, that’s when the real returns will come and make up for the time lost. Historically speaking, this has been the best way to compound money over a lifetime: you can still make money even by investing just during bull markets, but the difference is staggering. And both the Dow and S&P have always recovered from bear markets, so…

SP500 inflation-adjusted graph (logarithmic) / data from macrotrends

This is why I wouldn’t really fear a stock market crash, at least not if you have 20+ years of investing ahead. The real thing to fear is not reaching financial goals or having a low investment return over the whole lifetime, not in the short term.

Or again, the thing to fear is not having the stomach to invest during a downturn. That is also a risk, to control emotions. But a crash or long bear market by itself is actually the most helpful way to achieve higher returns if you keep investing during one.