Why market crash is good for long-term investors
The younger you are when the fall occurs,, the higher the benefit
The effect of some of your pension fund contributions being invested at lower prices after a market crash allows you to enjoy the good growth that comes from the recovery.
Buying into investment markets when they are cheap is so good that the investment experts say market crashes are actually good for long-term investors.
Old Mutual Corporate’s head of advice Andrew Davison considered the impact of a 30% fall in a pension fund member’s saving value. He looked at the case of a member earning R10,000 a month who starts saving at age 25 and continues until age 65, contributing - with her employer - 14% of her income. Assuming she earns a return of 5% more than inflation, she will retire with a pension equal to 82% of her income, he says.
Should the market fall 30% any time from her age 26 until she is about 61 and recover again within five years, she would be better off than if there was no fall and will enjoy a higher pension at retirement.
That is the effect of some of her contributions being invested at lower prices after the market fall and enjoying the good growth that comes from the recovery.
The younger you are when the fall occurs, the higher the benefit, Davison says.
Davison’s calculations show that if the member was at retirement age when the market fell, she could expect her pension to be about five percentage points lower than what it would have been without the fall.
If the member was between 62 and 65, her pension would also be negatively affected. Typically members within five years of retirement invest more conservatively than members who are close to retirement and this will limit your participation in the recovery, he says.
For members in retirement who are drawing a pension from their investments, the impact will also be severe especially as you will be forced to withdraw your pension from the reduced value of your capital before it has a chance to recover, thereby locking in losses with each withdrawal.