My title sounds like very strange- who wants to see their investments crash? However, if a crash is going to happen it is much better for you for it to happen sooner and for the recovery to happen later! Let’s explore a few graphs to see when and how much it could matter.
Let’s first consider a lump sum starting with $10,000 what happens in three cases:
- Blue – Uniform 8% Returns
- Red – Boom (133.3% gain) then Crash (-50%)
- Green – Crash (-50%) then Boom (133.3% gain)
- All 3 cases end with exactly the same amount
This isn’t an accident because multiplication is commutative, the order you multiply doesn’t matter: 3*5 = 5*3 = 15. However, most of us don’t do all of our investing in one giant sum.
- Totals Very Different:
Multiplication with addition (or subtraction) is NOT commutative, for example (5+1)*2+1 = 13 while (2+1)*5+1= 16. The order matters! It matters a lot in investing- if the crash happens first then the boom the total is over three times more than the boom first and then the crash. So when you start investing you should pray that the biggest crash happens immediately!