A couple of years ago I wrote, How A Stock Market Crash Could Accelerate Your FIRE. There’s a movement called FIRE that has nothing to do with burning. Instead, it stands for Financial Independence Retire Early. The column explained why young investors should prefer to see multiple year stock market drops. After all, market crashes allow them to buy stocks on sale. And when markets recover, such investors win big.

But what if Coronavirus fears cause stocks to drop 90 percent, as they did from October 1929 to July 1932? If businesses remain closed for several months, unemployment will soar. Business earnings would shrink, and (some believe) a 1929-like market drop might follow.

However, if you’re young and lucky enough to keep your job, continue to add money to your investments and ignore the financial media. After all, media reports will often play on your emotions. For example, some reporters say it took 26 years for stocks to recover from 1929. They should be hung upside down from a tree for at least 30 minutes (light, but necessary punishment). After all, those reporters are wrong and they’re just scaring people.

If you invested a lump sum in October 1929, it would have taken about five years for your money to recoup its original buying power.

Let me explain. Assume you had $1000 back in 1929. If you were able to invest that $1000 in a broad stock market index, it would have fallen hard. Dividends also dropped as companies struggled to survive The Great Depression. Assume General Electric paid a dividend of five cents a share in 1928. If the company’s stock traded at $1, this would have provided a dividend yield of 5 percent.

During The Great Depression, fewer people could buy General Electric’s goods. As a result, the company’s sales dropped. To survive, General Electric had to reduce their dividend payout. Assume the company chose to reduce its dividend payment from 5 cents a share down to 2 cents a share.

If General Electric’s stock price dropped from $1 a share down to 20 cents a share, the company’s dividend yield would have risen to 10 percent.

Dividend Payouts Can Drop While Dividend Yields Rise

Year Stock Price Per Share Annual Cash Dividend Paid Per Share Dividend Yield
1929 $1 5 cents 5%
1932 20 cents 2 cents 10%

In this example, if dividends were reinvested in new shares, the dividend payouts would have provided the foundation for fabulous future profits. Each dividend payment would have purchased a greater number of shares (or partial shares) in 1932, versus before the market crash in 1929.

Now I’ll show some actual figures. According to Valueline, the Dow Jones Industrials stocks averaged a dividend yield of 3.8 percent per year from 1926-1928. But when stocks hit their lowest point in 1932, the DOW Jones Industrials averaged dividend yields of 7.2 percent.

Dividend Yields For Dow Jones Industrials Stocks

1929-1933

Year Average Dividend Yield
1929 4.1%
1930 4.7%
1931 6.1%
1932 7.2%

When we include reinvested dividends, the Dow didn’t take 26 years to recover. It took about 16 years instead. But this doesn’t count for changes in the Consumer Price Index. As a result, you might think it took longer than 16 years for the DOW to break even, when you consider the dollar’s buying power. But that couldn’t be further from the truth. It only took about five years for stocks to recover from their 1929 peak.

Let me explain. During mass unemployment (think Coronavirus fears) people don’t have as much money to spend. As a result, companies must reduce the prices of their products. This happened from 1929-1933. The Consumer Price Index dropped. The same thing began to happen in 2009 when unemployment peaked.

Consumer Price Index
1929-1937

Year U.S. Deflation/Inflation Rate
1929 0%
1930 -2.7%
1931 -8.9%
1932 -10.3%
1933 -5.2%
1934 3.5%
1935 2.6%
1936 1.0%
1937 3.7%

Consider that person who put $1000 in U.S. stocks on October 1929. If they had owned a broad U.S. stock market index and reinvested their dividends, they could have sold their investments in 1934 and bought more goods and services with the proceeds than they could have done in 1929.

But most investors don’t add a single lump sum and never add money again. Instead, they invest every month.

Let’s assume a 30-year old invested $1000 on October 1929. Assume they continued to add $100 a month to that initial $1000 deposit. By October 1930, they would have added a total of $2,200. But their portfolio would have dropped to $1,668. News headlines would have screamed, “Protect Your Money Now!” But here’s what would have happened if they kept adding money.

After six years, they would have invested a total of $8,200. But by October 1935, their portfolio would have been worth $9,965. What’s more, goods and services cost less in 1935 than they did in 1929, so the buying power of this money (the real return) would have been even greater.

From 1929-1932, this investor’s monthly investments bought an ever-increasing number of stock market units. This would have been like shoveling money onto an ancient catapult. The longer it stayed in the “down position” the more money the investor would have made when that catapult launched.

By 1933, stocks began to rise again.

Starting Value October 1929: $1000
Added Monthly: $100

Total Added By: Market Value
October 1929: $1000 $1000
October 1930: $2,200 $1,668
October 1931: $3,400 $1,876
October 1932: $4,600 $2,693
October 1933: $5,800 $5,237
October 1934: $7000 $6,175
October 1935: $8,200 $9,965
October 1940: $14,200 $16,364
October 1950: $20,200 $68,357
October 1960: $26,200 $278,026
October 1970: $32,200 $520,206

By continuing to add $100 a month, the investor would have added a total of $26,200 by October 1960. By then, as shown on the table above, the portfolio’s value would have been $278,026. That’s a compound annual return of about 9.2 percent per year.

You might wonder, however, what would have happened if the investor had added a larger sum, up front, at the worst possible time (October 1929). Assume they added $10,000. That would have been a lot of money in 1929.

Assume they continued to add $100 a month. In dollar terms, their balance would have fallen hard from 1929-1932. But their dividend payments would have bought an ever-increasing number of new shares from 1929-1933.

Starting Value October 1929: $10,000
Added Monthly: $100

Total Added By: Market Value
October 1929: $10,000 $10,000
October 1930: $11,200 $7,622
October 1931: $12,400 $5,460
October 1932: $13,600 $5,408
October 1933: $14,800 $9,057
October 1934: $16,000 $9,875
October 1935: $17,200 $15,052
October 1936: $18,400 $23,217
October 1946: $30,400 $49,605
October 1956: $42,400 $265,400
October 1966: $54,400 $533,590
Source: DQYDJ calculator

And this investor would have soon seen a profit. By October 1936, they would have added a total of $18,400 and their portfolio value would have been worth $23,217. But once again, this understates their gain. After all, goods and services cost less in 1937 than they did in 1929 (note inflation/deflation levels listed in an earlier table above).

Nobody knows how stocks will perform this year, next year, or over the next decade. But if you are young, employed, healthy (and not swayed by short-term fear or greed) a stock market crash could set you up to win. If you have a lump sum, invest it now. Then keep loading your catapult, and wait for it to soar.

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Andrew Hallam is a Digital Nomad. He’s the author of the bestseller Millionaire Teacher and Millionaire Expat: How To Build Wealth Living Overseas