Rule of thumb · FinanceNº 35 / 149

A crash is good news right up until you stop saving

Run the same run of returns over your saving years and your retirement and it gives opposite answers. While contributing, the bad years arriving first leave you better off. While withdrawing, they are the thing that ends the portfolio.

Why it works

Order cannot matter at all with no money moving — a product of growth factors is the same in any order. It only starts to matter once there are flows, and the direction of the flow decides the sign. Contributions during a slump buy in cheap and are still there for the recovery, so early losses help. Withdrawals during a slump sell a larger fraction of a shrunken pot, and that capital never comes back to compound. Same returns, same average, opposite conclusion.

When it fails

It flips at the moment the flows do, which is not a date you get to choose — a redundancy or an early retirement can move it. And it says nothing about whether you can stomach the drop: the arithmetic being on your side does not make a 30% fall easy to hold through, and selling at the bottom converts the advantage into the loss.

Do it exactly

Estimate with the rule, then check it against the calculator that models it properly.

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Is a market crash bad if I am still saving?

Run the same run of returns over your saving years and your retirement and it gives opposite answers. While contributing, the bad years arriving first leave you better off. While withdrawing, they are the thing that ends the portfolio. Order cannot matter at all with no money moving — a product of growth factors is the same in any order.

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