Say you’re 30 years old and you own four index-based ETFs that track stock markets across the world. One of them tracks Canada, another the US of A, another Developed International Markets (Japan, Europe, Australia), and the last Emerging Markets (China, India, Brazil, South Africa, etc). Suppose further that you allocate 25% of your money to each for an even split.
Now, since you need to own ETFs for the very long term to let them grow—minimum 5 years, but ideally a couple decades or more—it pays to know how much a given stock market could drop. That way, you can calibrate expectations and avoid selling your investments due to a drop you should have been prepared for.
Thankfully, a data provider called Morningstar offers access to this information all in one place. All you have to do is:
- Type a broad market ETF ticker symbol into the search bar and click on the appropriate result
- Click on the ‘Performance’ tab
- Click on ‘Show Full Chart’ on the top left of the chart
- Click “Max’ to see the full price history
Here are ticker symbols for four popular ETFs so you can try this out for yourself—VCN (Vanguard FTSE Canada All Cap ETF) for Canada, VUN (Vanguard US Total Market ETF) for the USA, XEF (iShares Core MSCI EAFE IMI ETF) for Developed International Markets, and XEC (iShares Core MSCI Emer Mkts IMI ETF) for Emerging Markets. Historical results are, of course, no guarantee of future performance, but they’re the best indication we have to determine the bounds of what is normal.
If it hits you that the four investments linked above have all been in existence for less than 10 years, and you’re curious about previous historical drops, have a look at the worst market plunges in US history. It should quickly become apparent that a stock market crash could be anywhere between 20% to over 80% according to past data. And if you lose 3/4 of your investments in only a couple of years, it may take the next decade for you to get back to even.
That’s why it’s so important to know your risk tolerance and calibrate it by owning an appropriate percentage of bonds. The more bonds you own, the less your portfolio will fall during the next stock market crash. To see this dampening effect in action, check these Vanguard portfolios out and focus on how the lowest 12-month return gets bigger the more stocks the portfolio contains.
As a 30-year-old, you have many years to recover from down years in the market, meaning that these down years are actually opportunities for you to invest at lower prices. But as you grow older, you’ll want to transfer an increasingly larger percentage of stocks to bonds to keep your money safe for retirement.
Disclaimer: This article is meant for general education purposes only. It does not constitute financial advice as I am unaware of your personal situation. Consult with a professional who abides by a fiduciary standard before making any investment decisions.