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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