Right here’s an electronic mail we acquired from a podcast listener not too long ago:
This appears like one thing individuals solely say throughout a bull market. However it’s additionally form of a good query in some methods.
Volatility shouldn’t be danger except it causes you to make an funding error. In actual fact, volatility is a chance if you happen to use it appropriately.
And the U.S. inventory market has bounced again to new all-time highs from each single correction, bear market and crash in historical past so that may make it really feel like shares are risk-free in some methods.
Nonetheless, even a ten-ish plus yr time horizon could be painful at occasions.
You don’t should look that far again in historical past to discover a misplaced decade situation:
From early-2000 by way of the tip of 2011, the S&P 500 went nowhere. And that is whole returns together with the reinvestment of dividends. That’s a misplaced 12 years the place the market did nada for you. It actually felt dangerous to traders on the time.
To be truthful, it’s uncommon to see the sort of danger. Over the previous 100 years or so, returns have been constructive over rolling 10 yr returns 95% of the time:
That’s an excellent win price. The median 10 yr return was a +175%.
However you’ll be able to see there have been three distinct intervals of poor decade-long returns — the Thirties, Seventies and 2000s.1 Ten years can really feel like an eternity on the subject of watching your portfolio simply treading water.
That’s actual danger.
However danger can also be within the eye of the beholder on the subject of market environments like this.
In case you’re nonetheless saving and investing frequently, a extremely risky market that goes nowhere for a decade is a godsend. In case you dutifully plowed cash into the market from 2000-2011 you set your self up for the epic bull market that adopted the misplaced decade.
Some individuals should not have the power to easily sit tight throughout markets that spin their wheels for 10 years so that they diversify. Diversification can give you a smoother journey and offers you the power to lean into the ache by way of common rebalancing.
However all of this discuss is solely theoretical to an investor who hasn’t lived by way of a misplaced decade and felt the agony they will convey.
As Fred swed so eloquently wrote:
Like all of life’s wealthy emotional experiences, the total taste of dropping essential cash can’t be conveyed by literature. You can not convey to an inexperienced woman what it’s really wish to be a spouse and mom. There are specific issues that can’t be adequately defined to a virgin by phrases or photos. Nor can any description that I’d supply right here even approximate what it feels wish to lose an actual chunk of cash.
It’s straightforward to say what you’d do in that state of affairs however you don’t know for positive till you really dwell by way of it.
I don’t know when this can occur once more.
Perhaps market cycles have sped up and we get extra frequent drawdowns however they don’t final as lengthy. Or perhaps that’s wishful pondering and the following monetary disaster will result in a protracted interval of discomfort within the inventory market. In actual fact, the belief that we’ve someway finished away with prolonged downturns in all probability makes it extra possible we are going to see one due to a Minsky mindset.
Both method, it’s at all times good to stress-test your portfolio to raised perceive the forms of dangers you can encounter within the markets.
I agree that extending your time horizon as an investor is at all times useful.
However danger nonetheless exists.
Michael and I talked concerning the concept of the S&P 500 being risk-free and far more on this week’s Animal Spirits video:
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Additional Studying:
Might We See One other Misplaced Decade within the U.S. Inventory Market?
Now right here’s what I’ve been studying these days:
Books:
1And the Seventies outcomes are worse than they appear as a result of inflation was so excessive.
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