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Failure Is an Option

Kenyon Sayler

I RECENTLY LISTENED to author JL Collins on the Bogleheads Live podcast. Collins mentioned several times that stock declines never last. He isn’t alone in this assertion. You can read any number of books or articles that talk about the need to remain invested during stock market downturns because the market always recovers.

Perhaps it’s my training as an engineer. We’re taught to think about failure rates and probabilities of failure—which brings me to an uncomfortable notion: Just because the U.S. stock market hasn’t yet failed to recover doesn’t mean it’ll always recover. There are cases where the entire stock market has disappeared. Think Russia in 1918, Romania and Czechoslovakia in 1948, or Cuba in 1960.

It can also take a very long time for the stock market to recover—so long that many investors would give up or die before recouping their losses. It took the Taiwan stock market 17 years to return to its 2000 peak and the U.S. market 25 years to regain its 1929 peak. Meanwhile, the Japanese stock market hasn’t yet returned to its year-end 1989 all-time high. That’s 33 years and counting.

To be sure, if stock investors reinvest their dividends, they’d be made whole much sooner. Unfortunately, reinvesting dividends may not be possible for retirees living off their investments.

Let me be clear: I’m not predicting wholesale confiscation, as happened in communist countries. I’m also not predicting a prolonged bear market. I personally remain significantly invested in global stock markets, with a heavy tilt toward the U.S.

My only point is that market participants get rewarded for taking risk. There’s some small risk that a particular stock market will provide no price appreciation for decades—and perhaps even decline to zero.

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Jack McHugh
Jack McHugh
1 month ago

Done accumulating and with plans to retire at the end of 2022, I was thinking about this possibility all through 2021. And thinking about the “lost decade” and more suffered by the retirees of 2000.

Which (thankfully) made me aggressive about taking profits/rebalancing several times in 2021.

By last fall, with a substantially larger pile of 2-year treasuries and correspondingly smaller pile of stock index funds, I found myself thinking, “I don’t want to own any fewer stock shares going forward.”

And realizing, the asset ratio that looked so shockingly conservative at that point will appear a lot less so if stocks are down 40% someday… Or 25%.

Sure enough…

I was lucky, maybe a little bit good, and have no regrets – but it’s still not fun.

Nate Allen
Nate Allen
1 month ago

The “VT and chill” crowd would point out global (not single country) diversification, of course.

Rick Connor
Rick Connor
2 months ago

Kenyon, thanks for the thought-provoking story. One of the things I like about engineering and science is the predictability and testability of most things. I was taught that in areas where it is difficult to test or predict, you add margin, or avoid that area. Economics and finance don’t afford the same opportunity.

Derek R. Austin
Derek R. Austin
2 months ago

Sure, country risk is a well-known risk, but it’s a bit absurd to say “well, I was only counting ‘dividends not reinvested’ because you know, you might spend those.”

Chazooo
Chazooo
2 months ago

Given the way our wonderful country is currently being abused, most of us graybeard readers may not last long enough to see the “next recovery”, try as we might.

R Quinn
R Quinn
2 months ago
Reply to  Chazooo

Quite true, but what does that actually mean to us unless it is creating a financial problem today?

R Quinn
R Quinn
2 months ago

I think what may be missing here is that during those possible long years of recovery the saver/investor for retirement is still saving and accumulating more assets so that regaining from the past is not the only source of additional accumulation.

As far as the retiree goes if they are living off mostly dividends and interest, they will be okay as long as those payments continue. If they are counting a steady say 4% withdrawal which includes more than dividends, maybe not.

This is one reason I keep saying that the investment goal for retirement needs to be the ability to generate income equal to 100% of pre-retirement income even if not initially needed.

Last edited 2 months ago by R Quinn
parkslope
parkslope
2 months ago
Reply to  R Quinn

There is no getting around the fact that a long bear market (e.g., 10-15 years) would have a severe impact on the ability of 10s of millions of Americans to enjoy a comfortable retirement. It would also put your 100% of income in retirement goal out of reach for many more folks than is currently the case.

Jo Bo
Jo Bo
2 months ago

Having these thoughts in the background can help us as investors. Great misfortune befalls individuals and nations all too often (think wars and natural disasters), greatly affecting financial well-being, just as would the scenarios you describe.

What to do? Invest and save prudently, always think a little “outside the box”, and be able say at the end of the day that you did all you could with the cards you were dealt.

jay5914
jay5914
2 months ago

Not a popular topic, but I very much agree. While the odds of multiple “lost decades” for the US or other stock markets is low (complete disappearance much lower), it certainly isn’t zero. As you pointed out, history proves the point. IMHO, this adds further support to the case for diversifying globally with index funds, as well as using conservative return estimates particularly for retirees.

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