3 min read
Whether you love it or hate it, the stock market has been an absolute beast over the last nine years.
Any investments made in the stock market in early 2009 have tripled in value and any investments made in early 2012 have doubled in value. Despite the naysayers screaming for the past several years that another crash is coming, the market has steadily risen higher and higher.
But with prices at an all-time high, even the most optimistic investors are beginning to wonder “Can this bull market keep this pace for much longer?”
Many argue that the best case scenario would be slow, steady continued growth. On the other end of the spectrum, many consider the worst case scenario to be a potential repeat of the financial meltdown of 2008, when the market dropped roughly 50% in value:
I want to explore exactly what impact a 50% stock market crash would have on anyone who has a net worth of $100k or less.
$100k or Less? No Reason to be Scared
During the last market crash it took about 1 year and 4 months for the market to go from peak to trough. Now imagine if the next crash happens even faster and only takes one year to shed half it’s value.
If you have a net worth of exactly $100,000 and have 100% of your money invested in stocks, your net worth would drop from $100,000 to $50,000 over the course of a year…
…but only if you don’t save any money at all during that year.
If you managed to save $50,000 over the course of that year your ending net worth would remain at $100,000.
If you’re a big saver with a low net worth, you can cancel out investment losses with your savings.
Personally my net worth is about $68k and I can save $50k a year. Around 85% of my net worth is in stocks or similar equities, so a 50% drop in value would mean my net worth would drop to $39k over the course of a year.
But that would only be the case if I didn’t save any money during that year. If I saved my usual $50k my net worth would actually still increase in value that year:
This illustrates an important point: When your net worth is $100k or less, you simply don’t have enough money invested to experience a significant drop in net worth. In many cases you can save enough money to completely offset investment losses and even increase your net worth during a market crash.
This table shows exactly how much money you would need to save to offset investment losses and maintain your net worth during a 50% stock market drop:
My advice to anyone with a net worth of $100k or less is straightforward: don’t stress about the stock market. It may keep rallying for years to come or it may crash very soon. Nobody knows. Focus on saving as much as you can and increasing your income.
I recently shared my thoughts on this current stock market via Twitter:
This advice is especially relevant for people who have a net worth of $100k or less. Focus on saving money. A potential stock market crash shouldn’t scare you at all.
Zach is the author behind Four Pillar Freedom, a blog that teaches you how to build wealth and gain freedom in life.
Zach's favorite free financial tool he's been using since 2015 to manage his net worth is Personal Capital. Each month he uses their free Investment Checkup tool and Retirement Planner to track his investments and ensure that he's on the fast track to financial freedom.
Although the bulk of his net worth is invested in index funds, his favorite place to invest in individual stocks is M1 Finance, a site that allows you to build a custom portfolio of stocks for free.
His favorite way to save money each month on his recurring bills is by using Trim, a free financial app that negotiates lower cable, internet, and phone bills with any provider on your behalf.
His favorite place to find new personal finance articles to read is Collecting Wisdom, a site that collects the best personal finance articles floating around the web on a daily basis.
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