How big is the risk of sustained huge stock market decline?

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VartAndelay
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How big is the risk of sustained huge stock market decline?

Post by VartAndelay »

I am holding money in total USA stock index fund and total international stock index fund. However I have seen on other forums and posts people talking about how they think the stock market is overvalued and predicting a decline. And they point to examples such as Japan in the 1980s where the stock market crashed and did not recover for a very long time. How big is this risk? They seem to be talking about the Federal Reserve and "easy money" propping up the stock market for a decade or more and are predicting there could be a huge crash that does not recover for a very long time or maybe even it never recovers. I think they mentioned something about how interest rates will have to eventually be increased and how this would crash the stock market.
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TomatoTomahto
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Re: How big is the risk of sustained huge stock market decline?

Post by TomatoTomahto »

If I knew, I’d be rich. If they knew, they’d shut up.
I get the FI part but not the RE part of FIRE.
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greg24
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Re: How big is the risk of sustained huge stock market decline?

Post by greg24 »

A large decline is inevitable. You should construct your asset allocation to be prepared for such a possibility.
csan
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Re: How big is the risk of sustained huge stock market decline?

Post by csan »

VartAndelay wrote: Wed May 05, 2021 3:44 pm I am holding money in total USA stock index fund and total international stock index fund. However I have seen on other forums and posts people talking about how they think the stock market is overvalued and predicting a decline. And they point to examples such as Japan in the 1980s where the stock market crashed and did not recover for a very long time. How big is this risk? They seem to be talking about the Federal Reserve and "easy money" propping up the stock market for a decade or more and are predicting there could be a huge crash that does not recover for a very long time or maybe even it never recovers. I think they mentioned something about how interest rates will have to eventually be increased and how this would crash the stock market.
I ran it through my calculator to compute the risk and it returned "?"

But seriously, nobody knows. Just stick to an asset allocation that fulfills your needs (mental sanity included)
Last edited by csan on Wed May 05, 2021 3:57 pm, edited 1 time in total.
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RickBoglehead
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Re: How big is the risk of sustained huge stock market decline?

Post by RickBoglehead »

The world is ending, the market will decline hugely.

Or not.
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Re: How big is the risk of sustained huge stock market decline?

Post by sycamore »

csan wrote: Wed May 05, 2021 3:51 pm I ran it through my calculator to compute the risk and it returned "?"
Mine said 42.
59Gibson
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Re: How big is the risk of sustained huge stock market decline?

Post by 59Gibson »

Nearly everything is just a question of when.. 3 months, 30 years, 300 years etc..Depends on definition of huge. 25% decline is prob much more likely than 85%
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Re: How big is the risk of sustained huge stock market decline?

Post by Californiastate »

People tend to believe they are very risk tolerant when the market is up. The next big drop tends to shake out those with less conviction.

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Re: How big is the risk of sustained huge stock market decline?

Post by 123 »

The general advice often seen here is that investors should be prepared for a decline of 50% in the value of their equity (stock) holdings at any time. This seems to be in line with the history I have observed. If the stock market is "puffed up" at the time of such decline it could be more than 50%. Recovery from such a decline could take a year or more and could quite possibly extend over 10 or more years. Plan and invest accordingly!

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Walkure
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Re: How big is the risk of sustained huge stock market decline?

Post by Walkure »

VartAndelay wrote: Wed May 05, 2021 3:44 pm And they point to examples such as Japan in the 1980s where the stock market crashed and did not recover for a very long time. How big is this risk? They seem to be talking about the Federal Reserve and "easy money" propping up the stock market for a decade or more and are predicting there could be a huge crash that does not recover for a very long time or maybe even it never recovers.
Interestingly I think it is the convergence of these two examples that makes a "sustained decline" improbable. Japan's market initially declined because it was overpriced. However, it has been able to sustain that decline because its currency is able to deflate vis-a-vis the rest of the world. As long as the US market is denominated in dollars, and the dollar remains the preeeminent global reserve currency, it doesn't really matter how much easy money the Fed produces because it cannot deflate relative to itself. The monetary base would just have to find another asset to inflate (Treasuries, real estate, etc.) but that's already happened. In a word, TINA.
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Re: How big is the risk of sustained huge stock market decline?

Post by J295 »

I believe SPY was down about 50% over 16 months time during the great recession, and it was a 48 month recovery time from peak back to breakeven.

One of the challenges about such a time is you don’t know when you will get to the end of the tunnel (as you watch your equity balances get cut in half, bonds and other assets decline, businesses get completely shuttered, and jobs being lost almost overnight).

This from someone who was “lucky” in that I was near early retirement with 100% equities and a very good job that actually benefited from the recession, so I rode it out. But I rode it out not because of any great conviction or strength on my part, but just because I didn’t know any different at the time. I say “lucky” because of the good job and the fact that the market did eventually come back and I could still early retire by January 2013.
goblue100
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Re: How big is the risk of sustained huge stock market decline?

Post by goblue100 »

The risk of a huge stock market decline is probably less than the risk of trying to time the market. Stay the course.
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Re: How big is the risk of sustained huge stock market decline?

Post by Fallible »

sycamore wrote: Wed May 05, 2021 3:54 pm
csan wrote: Wed May 05, 2021 3:51 pm I ran it through my calculator to compute the risk and it returned "?"
Mine said 42.
Now why does 42 sound imaginary? :)

OP, rather than worry about a future you can't know, concentrate on taking the amount of risk that's right for you. Know how long you can go in a prolonged downturn before you'll need the money, and how much you can afford to lose.
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Re: How big is the risk of sustained huge stock market decline?

Post by jef »

greg24 wrote: Wed May 05, 2021 3:47 pm A large decline is inevitable. You should construct your asset allocation to be prepared for such a possibility.
greg 24 gave the correct answer to this question, its not if, but when.... be ready for the possibility.
Carol88888
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Re: How big is the risk of sustained huge stock market decline?

Post by Carol88888 »

If people are talking about a crash it won't happen because it's just the usual wall of worry.

And, if people really believed in a crash they would have taken their money out already.

So many variables and they are constantly changing. No way to game this thing.

Crashes usually come when there is euphoria and a strong consensus that things will only get better.
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Re: How big is the risk of sustained huge stock market decline?

Post by SteadyOne »

Stock market crashes happen when nobody talks about them. They come suddenly and as a shock to masses.

My guide is the old good yield curve. Once it inverts, I expect the stock market collapse within few months to a year or so. It worked for me last three or four times. Right now it’s not inverted. Last time I recall it inverted in May 2019.
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Re: How big is the risk of sustained huge stock market decline?

Post by rob »

Talking heads have predicted 87 of the last 7 downturns.... and 34% of statistics on the internet are made up. I have no ability to project and neither does anyone else - especially people trying to sell you stuff....
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KlangFool
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Re: How big is the risk of sustained huge stock market decline?

Post by KlangFool »

OP,

I don't know and I don't care. I am prepared. The stock market can crash and stayed down for 5 to 8 years and I will be fine.

Are you prepared? If you are not, why not?

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HootingSloth
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Re: How big is the risk of sustained huge stock market decline?

Post by HootingSloth »

It is a possibility. Because you only get to live one life, I think it is worth thinking about and being prepared for the possibilities. This does not mean that you let any one possibility control your decisionmaking process. But you should consider how it would affect your life and whether you are comfortable with the consequences. Personally, I do not think that you should try to put parameters on the size and duration of the potential downturn (e.g., a 50% drawdown that lasts for 10 years).

Drawdowns can be extremely severe. Several countries have had their stock markets fall to zero, despite the fact that life went on and people continued to make do with what they had.

Drawdowns can also be extremely long lasting. Dimson and Marsh found that in 6 of the 16 countries with long-term stock return data, investors would need to have waited more than 50 years to be assured of a positive return. Nor will global diversification necessarily save you. Dimson and Marsh looked at the results for a globally diversified portfolio, and report:
[For a U.S. investor investing in a global portfolio,] the annualized real returns were consistently positive over all intervals of at least 21 years. . . . [However,] when world index returns are expressed in German marks (now euros) from the perspective of a German citizen, they reveal that a German global investor would have needed to wait 57 years to be assured of a positive real return. Similarly, global investors in the world index from Italy and Japan would have needed horizons of 33 and 34 years. These extended horizons are the result of the historical volatility of real exchange rates.
What to do in the face of this kind of risk? Realize that it is a possibility. Give a bit of thought to how you might adapt if that possibility came to pass. If you do, I think you will find that you would be able to muddle through. Humans are very resourceful. Sometimes, embracing the inherent uncertainty of life--and of our investments--can be freeing. There might be a "sustained huge stock market decline." You could lose your investments entirely. But chances are good that you will not lose them all but will instead prosper. Have a plan and don't let fear of uncertainty or worst-case-scenarios stop you from executing on it.
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Re: How big is the risk of sustained huge stock market decline?

Post by Random Musings »

It's not a matter of if, but when. If I could only figure out the "when" part.

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Re: How big is the risk of sustained huge stock market decline?

Post by trajan08 »

sycamore wrote: Wed May 05, 2021 3:54 pm
csan wrote: Wed May 05, 2021 3:51 pm I ran it through my calculator to compute the risk and it returned "?"
Mine said 42.
I got 42 also
UpperNwGuy
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Re: How big is the risk of sustained huge stock market decline?

Post by UpperNwGuy »

The risk of a 50% stock market decline with a recovery within a few years is high. The risk of another Great Depression with a multi-decade recovery is low.
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Re: How big is the risk of sustained huge stock market decline?

Post by Escapevelocity »

If we talk about a sustained huge decline spanning 5+ years, I think it would need to be precipitated by some sort of major calamity like the next MAJOR war or breakdown of civil order or a perhaps pandemic even worse than the one we are going through now and for which there is no vaccine or cure on the horizon. Anything that does not reach this level of significance is likely to shake out within a year or two before the next growth cycle begins.
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Re: How big is the risk of sustained huge stock market decline?

Post by BolderBoy »

trajan08 wrote: Wed May 05, 2021 9:19 pm
sycamore wrote: Wed May 05, 2021 3:54 pm
csan wrote: Wed May 05, 2021 3:51 pm I ran it through my calculator to compute the risk and it returned "?"
Mine said 42.
I got 42 also
Odd. I got 42.00000000000000001. Nothing quite like precise imprecision, eh?
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Re: How big is the risk of sustained huge stock market decline?

Post by firebirdparts »

Personally I don't think the risk is very big. Inflation is not really harmful to stocks overall (higher cost of capital offset by inflating of earnings). High interest rates without inflation would seem to be impossible, given that the U.S. Government would go bankrupt in that scenario, and that they don't have to.

There is going to be a lot of purposeful work for both people and capital to do as the technologies we use to just live are recreated and replaced. The USA is amazingly productive.
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Re: How big is the risk of sustained huge stock market decline?

Post by JackoC »

HootingSloth wrote: Wed May 05, 2021 9:15 pm
Drawdowns can be extremely severe. Several countries have had their stock markets fall to zero, despite the fact that life went on and people continued to make do with what they had.

Drawdowns can also be extremely long lasting. Dimson and Marsh found that in 6 of the 16 countries with long-term stock return data, investors would need to have waited more than 50 years to be assured of a positive return. Nor will global diversification necessarily save you. Dimson and Marsh looked at the results for a globally diversified portfolio, and report:
True and one silver lining in this is that *if* that happens, expectations of standard of living will drop. Investing, like almost everything, has a social component. There can be devastating psychological pain in screwing up and losing most of your money when things are generally going well, as for example when you bail out of stocks at the -50% point of a short lived crash (like 2008-9) and don't have the courage to get back in before it's way higher. If it just keeps going down then more or less flatlines for 20 yrs (Nikkei) lots of other investors will be screwed also and you won't feel as bad relative to your loss: misery loves company.

Trying to be up beat here. :happy But seriously, I believe one should have a plausible strategy to get by with at least an 80% drop in the stock market followed by only mediocre gains for decades. Get by, not fulfil all your fondest material dreams. Also part of the strategy can be many years or decades left to make up the loss with more labor income, so I'm not ruling out high exposure to risk assets for younger people. I'm also thinking of total asset position, not the thing where the person who can fund 100% of their basic expenses from Social Security and pension, living in a paid for house, boasts on the forum they are '100% stock'. Those people are way less than 100% stock. When I say X% stock, I mean for real.

I see no reason to concentrate all risk in one country's stock market. That bet has worked well recently in case of concentrating all in the US, but market bets in general work around 1/2 the time, so recent performance is not a good argument against basic diversification IMO.
Last edited by JackoC on Thu May 06, 2021 9:57 am, edited 1 time in total.
Ramjet
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Re: How big is the risk of sustained huge stock market decline?

Post by Ramjet »

UpperNwGuy wrote: Wed May 05, 2021 9:24 pm The risk of a 50% stock market decline with a recovery within a few years is high
How many 50% declines have there been in the history of the U.S. stock market
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Re: How big is the risk of sustained huge stock market decline?

Post by Shallowpockets »

OP. Why don’t you look up the historical chart of the stock market and see where the dips are. Look at the recovery. You can also google to see how long recovery takes, in each drop and as an average. Look at 2008.
Then you can interpret the data as you wish.
All that data would be open to interpretation and that is what you are hearing and seeing. Other people’s take on what will or won’t happen now.
Take a breath and look it up and think about it.
There are really only two choices, move money out/around or not.
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Re: How big is the risk of sustained huge stock market decline?

Post by HootingSloth »

JackoC wrote: Thu May 06, 2021 9:53 am
HootingSloth wrote: Wed May 05, 2021 9:15 pm
Drawdowns can be extremely severe. Several countries have had their stock markets fall to zero, despite the fact that life went on and people continued to make do with what they had.

Drawdowns can also be extremely long lasting. Dimson and Marsh found that in 6 of the 16 countries with long-term stock return data, investors would need to have waited more than 50 years to be assured of a positive return. Nor will global diversification necessarily save you. Dimson and Marsh looked at the results for a globally diversified portfolio, and report:
True and one silver lining in this is that *if* that happens, expectations of standard of living will drop. Investing, like almost everything, has a social component. There can be devastating psychological pain in screwing up and losing most of your money when things are generally going well, as for example when you bail out of stocks at the -50% point of a short lived crash (like 2008-9) and don't have the courage to get back in before it's way higher. If it just keeps going down then more or less flatlines for 20 yrs (Nikkei) lots of other investors will be screwed also and you won't feel as bad relative to your loss: misery loves company.

Trying to be up beat here. :happy But seriously, I believe one should have a plausible strategy to get by with at least an 80% drop in the stock market followed by only mediocre gains for decades. Get by, not fulfil all your fondest material dreams. Also part of the strategy can be many years or decades left to make up the loss with more labor income, so I'm not ruling out high exposure to risk assets for younger people. I'm also thinking of total asset position, not the thing where the person who can fund 100% of their basic expenses from Social Security and pension, living in a paid for house, boasts on the forum they are '100% stock'. Those people are way less than 100% stock. When I say X% stock, I mean for real.

I see no reason to concentrate all risk in one country's stock market. That bet has worked well recently in case of concentrating all in the US, but market bets in general work around 1/2 the time, so recent performance is not a good argument against basic diversification IMO.
JackoC, I agree with everything you said. I know you understood this, but to be clear for others, although the particular statistics I picked out might sound like they paint a bleak picture, I think they are perfectly consistent with having most of one's portfolio devoted to stocks in the appropriate circumstances. I think that it would be reasonable for a young person with a lot of stable human capital to hold, for example, 6 months expenses in cash and five years expenses in stocks. Such a person would probably describe themselves as holding "100% stock" with a 6-month emergency fund. (While I would not necessarily view it that way, I don't have a problem with it as a short-hand description.)

Personally, I believe in global stock investing for the reasons you state. I follow an allocation of 80% global market cap + 20% U.S., with the modest home country tilt reflecting the fact that I desire modestly less exposure to currency risk for currencies other than the USD.
Global Market Portfolio + modest tilt towards volatility (80/20->60/40 as approach FI) + modest tilt away from exchange rate risk (80% global+20% U.S. stocks; currency-hedge bonds) + tax optimization
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Re: How big is the risk of sustained huge stock market decline?

Post by Robot Monster »

KlangFool wrote: Wed May 05, 2021 8:50 pm OP,

I don't know and I don't care. I am prepared. The stock market can crash and stayed down for 5 to 8 years and I will be fine.

Are you prepared? If you are not, why not?

KlangFool
Might not the market stay crashed for a lot longer than 5 to 8 years?

From 1991-2011 the Nikkei had a total return of -64.241%. That calculation can be performed here.
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Re: How big is the risk of sustained huge stock market decline?

Post by KlangFool »

Robot Monster wrote: Thu May 06, 2021 10:25 am
KlangFool wrote: Wed May 05, 2021 8:50 pm OP,

I don't know and I don't care. I am prepared. The stock market can crash and stayed down for 5 to 8 years and I will be fine.

Are you prepared? If you are not, why not?

KlangFool
Might not the market stay crashed for a lot longer than 5 to 8 years?

From 1991-2011 the Nikkei had a total return of -64.241%. That calculation can be performed here.
Robot Monster,

As a minority, if the market stay crashed for longer than 5 years, it is no longer a money problem. Time to activate plan C, D, and E. In an economic crisis, the minority is always used as the scapegoat.

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galeno
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Re: How big is the risk of sustained huge stock market decline?

Post by galeno »

Exactly.
greg24 wrote: Wed May 05, 2021 3:47 pm A large decline is inevitable. You should construct your asset allocation to be prepared for such a possibility.
KISS & STC.
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galeno
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Re: How big is the risk of sustained huge stock market decline?

Post by galeno »

Yep again.
KlangFool wrote: Thu May 06, 2021 10:29 am
Robot Monster wrote: Thu May 06, 2021 10:25 am
KlangFool wrote: Wed May 05, 2021 8:50 pm OP,

I don't know and I don't care. I am prepared. The stock market can crash and stayed down for 5 to 8 years and I will be fine.

Are you prepared? If you are not, why not?

KlangFool
Might not the market stay crashed for a lot longer than 5 to 8 years?

From 1991-2011 the Nikkei had a total return of -64.241%. That calculation can be performed here.
Robot Monster,

As a minority, if the market stay crashed for longer than 5 years, it is no longer a money problem. Time to activate plan C, D, and E. In an economic crisis, the minority is always used as the scapegoat.

KlangFool
KISS & STC.
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Re: How big is the risk of sustained huge stock market decline?

Post by UpperNwGuy »

Ramjet wrote: Thu May 06, 2021 9:57 am
UpperNwGuy wrote: Wed May 05, 2021 9:24 pm The risk of a 50% stock market decline with a recovery within a few years is high
How many 50% declines have there been in the history of the U.S. stock market
I have no idea. You tell me.
59Gibson
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Re: How big is the risk of sustained huge stock market decline?

Post by 59Gibson »

KlangFool wrote: Thu May 06, 2021 10:29 am
Robot Monster wrote: Thu May 06, 2021 10:25 am
KlangFool wrote: Wed May 05, 2021 8:50 pm OP,

I don't know and I don't care. I am prepared. The stock market can crash and stayed down for 5 to 8 years and I will be fine.

Are you prepared? If you are not, why not?

KlangFool
Might not the market stay crashed for a lot longer than 5 to 8 years?

From 1991-2011 the Nikkei had a total return of -64.241%. That calculation can be performed here.
Robot Monster,

As a minority, if the market stay crashed for longer than 5 years, it is no longer a money problem. Time to activate plan C, D, and E. In an economic crisis, the minority is always used as the scapegoat.

KlangFool
I do not know what you mean by minority part, but I agree if the market crashed and hasn't budged in 5-8 years I think we'd be in for very bad times. That's always the issue with the 1-2%ers SWR folks. Once you've crossed the rubicon of needing 50-75x expenses to make it, everything else is in question(USA, SS, pension, annuities, functioning economy). There is a limit to planning for things going so bad
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Re: How big is the risk of sustained huge stock market decline?

Post by KlangFool »

59Gibson wrote: Thu May 06, 2021 10:54 am
KlangFool wrote: Thu May 06, 2021 10:29 am
Robot Monster wrote: Thu May 06, 2021 10:25 am
KlangFool wrote: Wed May 05, 2021 8:50 pm OP,

I don't know and I don't care. I am prepared. The stock market can crash and stayed down for 5 to 8 years and I will be fine.

Are you prepared? If you are not, why not?

KlangFool
Might not the market stay crashed for a lot longer than 5 to 8 years?

From 1991-2011 the Nikkei had a total return of -64.241%. That calculation can be performed here.
Robot Monster,

As a minority, if the market stay crashed for longer than 5 years, it is no longer a money problem. Time to activate plan C, D, and E. In an economic crisis, the minority is always used as the scapegoat.

KlangFool
I do not know what you mean by minority part, but I agree if the market crashed and hasn't budged in 5-8 years I think we'd be in for very bad times. That's always the issue with the 1-2%ers SWR folks. Once you've crossed the rubicon of needing 50-75x expenses to make it, everything else is in question(USA, SS, pension, annuities, functioning economy). There is a limit to planning for things going so bad
59Gibson,

<<I do not know what you mean by minority part, but I agree if the market crashed and hasn't budged in 5-8 years I think we'd be in for very bad times. >>

That required a different kind of planning beyond your normal personal finance planning.

<<There is a limit to planning for things going so bad>>

I disagreed. You could still plan for it. And, it is a different kind of planning. It starts with having enough food, water, physical gold and silver. A plan to go some place else and so on.

KlangFool
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Re: How big is the risk of sustained huge stock market decline?

Post by 59Gibson »

KlangFool wrote: Thu May 06, 2021 10:59 am
59Gibson wrote: Thu May 06, 2021 10:54 am
KlangFool wrote: Thu May 06, 2021 10:29 am
Robot Monster wrote: Thu May 06, 2021 10:25 am
KlangFool wrote: Wed May 05, 2021 8:50 pm OP,

I don't know and I don't care. I am prepared. The stock market can crash and stayed down for 5 to 8 years and I will be fine.

Are you prepared? If you are not, why not?

KlangFool
Might not the market stay crashed for a lot longer than 5 to 8 years?

From 1991-2011 the Nikkei had a total return of -64.241%. That calculation can be performed here.
Robot Monster,

As a minority, if the market stay crashed for longer than 5 years, it is no longer a money problem. Time to activate plan C, D, and E. In an economic crisis, the minority is always used as the scapegoat.

KlangFool
I do not know what you mean by minority part, but I agree if the market crashed and hasn't budged in 5-8 years I think we'd be in for very bad times. That's always the issue with the 1-2%ers SWR folks. Once you've crossed the rubicon of needing 50-75x expenses to make it, everything else is in question(USA, SS, pension, annuities, functioning economy). There is a limit to planning for things going so bad
59Gibson,

<<I do not know what you mean by minority part, but I agree if the market crashed and hasn't budged in 5-8 years I think we'd be in for very bad times. >>

That required a different kind of planning beyond your normal personal finance planning.

<<There is a limit to planning for things going so bad>>

I disagreed. You could still plan for it. And, it is a different kind of planning. It starts with having enough food, water, physical gold and silver. A plan to go some place else and so on.

KlangFool
Thats what I meant we're entering a situation beyond financial/retirement planning. Retirement most likely no longer an option for the vast majority.
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Re: How big is the risk of sustained huge stock market decline?

Post by seajay »

Ramjet wrote: Thu May 06, 2021 9:57 am
UpperNwGuy wrote: Wed May 05, 2021 9:24 pm The risk of a 50% stock market decline with a recovery within a few years is high
How many 50% declines have there been in the history of the U.S. stock market
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Jags4186
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Re: How big is the risk of sustained huge stock market decline?

Post by Jags4186 »

Instead of bombarding you with graphs I'll leave you with this tidbit about the SP500.

1970-1979: -1.45% real return
1980-1989: +11.97% real return
1990-1999: +14.94% real return
2000-2009: -3.42% real return
2010-2019: +11.6% real return

So, 2 out of the last 5 decades have had "sustained" stock market declines. There's a pretty good chance of it happening again. Maybe 2020-2029 will be like 1990-1999 and 2030-2039 will be like 1970-1979. Impossible to know.
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JoeRetire
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Re: How big is the risk of sustained huge stock market decline?

Post by JoeRetire »

VartAndelay wrote: Wed May 05, 2021 3:44 pmI have seen on other forums and posts people talking about how they think the stock market is overvalued and predicting a decline. And they point to examples such as Japan in the 1980s where the stock market crashed and did not recover for a very long time. How big is this risk?
(shrug)

If it worries you, either get out of the stock market, or stop reading those other forums.
I vote for the latter.
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Re: How big is the risk of sustained huge stock market decline?

Post by watchnerd »

Jags4186 wrote: Thu May 06, 2021 11:14 am Instead of bombarding you with graphs I'll leave you with this tidbit about the SP500.

1970-1979: -1.45% real return
1980-1989: +11.97% real return
1990-1999: +14.94% real return
2000-2009: -3.42% real return
2010-2019: +11.6% real return

So, 2 out of the last 5 decades have had "sustained" stock market declines. There's a pretty good chance of it happening again. Maybe 2020-2029 will be like 1990-1999 and 2030-2039 will be like 1970-1979. Impossible to know.
Or 2020-2029 will be like 2000-2009.

And 2030-2039 will be like 1990-1999.

That would be my preference. ;)
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Re: How big is the risk of sustained huge stock market decline?

Post by nimo956 »

Sometimes there is just nothing you can do, no matter how well you prepare. At the start of WWI, Viktor Ephrussi, a Jew from a prominent banking family (alongside the Rothschilds), was one of the richest men in the world, with assets spread across several countries. From “The Hare with Amber Eyes:”
As the citizen of a defeated power, all his assets in London and in Paris, the accounts that had been building over forty years, the office building in one city, the share of Ephrussi et Cie in another, had been confiscated under the Allied terms of the punitive settlement after the war. In the Bolshevik conflagration, the Russian fortune - the gold held in St. Petersburg, the shares in the Baku oilfields, the railways and the banks and the property Viktor still owned in Odessa - had disappeared...

And, more personally, at the height of the war in 1915 Jules Ephrussi, Charles’ elder brother and owner of the Chalet, had died. Because of the hostilities his vast fortune, long promised to Viktor, had been left to French cousins.

...And his decision to leave his money in Austria proved catastrophic. This newly minted patriotic Austrian citizen had invested massively in war bonds late into 1917. They were worthless too.
Later during WWII, the bank he owned in Vienna was sold for pennies on the dollar so he could bribe his way out of the city after the Anschluss (it’s now a part of Deutsche Bank). The Nazis confiscated his vast art collection of Monets, Renoirs, Rembrandts, etc. After two wars, his fortune, estimated at the equivalent of over $400 million was reduced to essentially nothing. All that survived was the collection of 264 Japanese netsuke.
Last edited by nimo956 on Thu May 06, 2021 11:32 am, edited 3 times in total.
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Re: How big is the risk of sustained huge stock market decline?

Post by gwe67 »

Right when the Dow hit 10,000 I sold some investments to buy a house. I thought this was good timing since the markets were at an "all time high" and talking heads said that Dow 10,000 was unsustainable. What's the Dow at these days?
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Re: How big is the risk of sustained huge stock market decline?

Post by KlangFool »

59Gibson wrote: Thu May 06, 2021 11:08 am
Thats what I meant we're entering a situation beyond financial/retirement planning. Retirement most likely no longer an option for the vast majority.
59Gibson,

This is a personal finance forum. We are incapable of solving the vast majority retirement problem. We can only teach/coach/advise folks that are willing to listen.

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Re: How big is the risk of sustained huge stock market decline?

Post by seajay »

Jags4186 wrote: Thu May 06, 2021 11:14 am Instead of bombarding you with graphs I'll leave you with this tidbit about the SP500.

1970-1979: -1.45% real return
1980-1989: +11.97% real return
1990-1999: +14.94% real return
2000-2009: -3.42% real return
2010-2019: +11.6% real return
Total stock January 2000 to end of February 2009 when applying a rule of thumb Safe Withdrawal Rate of 4%
Image
saw a $1M start date portfolio drop to $263K (-13.6% annualized decline rate)
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Re: How big is the risk of sustained huge stock market decline?

Post by watchnerd »

59Gibson wrote: Thu May 06, 2021 10:54 am I do not know what you mean by minority part, but I agree if the market crashed and hasn't budged in 5-8 years I think we'd be in for very bad times. That's always the issue with the 1-2%ers SWR folks. Once you've crossed the rubicon of needing 50-75x expenses to make it, everything else is in question(USA, SS, pension, annuities, functioning economy). There is a limit to planning for things going so bad
You should read the studies on the year 2000 retiree cohort, who dealt with exactly what you describe.

They've done pretty okay with SWR to the present.
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Re: How big is the risk of sustained huge stock market decline?

Post by alpine_boglehead »

You're asking an umbrella question which includes these sub risks, including inspirational movies (and the list is not complete).
  • Political/societal risks (e.g. wars, social unrest, pandemics). Dr. Strangelove, World War Z​, The 3 Body Problem
  • Natural disasters (e.g. natural systems gradually going downhill, spectacular ones). Deep Impact/Armageddon, The Day After Tomorrow
  • Fraud, mismanagement, misjudgment. Enron: The Smartest Guys in the Room, Trillion Dollar Bet, The Big Short
The stock market doesn't exist in isolation. It's only a proxy for the economic circumstances.

On top of that there's human psychology - e.g. investors somehow realizing that they have paid too much for their investments, and valuing them more conservatively in the future.
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Re: How big is the risk of sustained huge stock market decline?

Post by Ramjet »

UpperNwGuy wrote: Thu May 06, 2021 10:46 am
Ramjet wrote: Thu May 06, 2021 9:57 am
UpperNwGuy wrote: Wed May 05, 2021 9:24 pm The risk of a 50% stock market decline with a recovery within a few years is high
How many 50% declines have there been in the history of the U.S. stock market
I have no idea. You tell me.
Two and a few that got close. Excluding the great depression the average recovery time was about 4.5 years. Maybe OP should consider holding around 4 or 5 years in TIPS or cash in retirement if they are that worried about prolonged draw downs

10/1929 - 06/1932 = -84%
11/2007 - 03/2009 = -50%
09/2000 - 02/2003 = -43%
02/1973 - 12/1974 = -43%
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Re: How big is the risk of sustained huge stock market decline?

Post by Blue456 »

VartAndelay wrote: Wed May 05, 2021 3:44 pm I am holding money in total USA stock index fund and total international stock index fund. However I have seen on other forums and posts people talking about how they think the stock market is overvalued and predicting a decline. And they point to examples such as Japan in the 1980s where the stock market crashed and did not recover for a very long time. How big is this risk? They seem to be talking about the Federal Reserve and "easy money" propping up the stock market for a decade or more and are predicting there could be a huge crash that does not recover for a very long time or maybe even it never recovers. I think they mentioned something about how interest rates will have to eventually be increased and how this would crash the stock market.
Rational Reminders had an interesting episode on rolling 30 year returns. For a total world investor worst outcome between 1900-2020 was something around 1.5% real return. For single country investor outcome was - 0.8%.
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Re: How big is the risk of sustained huge stock market decline?

Post by JoeRetire »

gwe67 wrote: Thu May 06, 2021 11:27 am Right when the Dow hit 10,000 I sold some investments to buy a house. I thought this was good timing since the markets were at an "all time high" and talking heads said that Dow 10,000 was unsustainable. What's the Dow at these days?
Still unsustainable, per the same talking heads.
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