Hypothetical chance of bond or stock index going to zero

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BogleInvestorLondon
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Hypothetical chance of bond or stock index going to zero

Post by BogleInvestorLondon »

Hi

I just had a discussion with someone about the hypothetical scenarios above. I am not worried about these events happening but I would like to know how to compare the chances of either happening and finding out which is more likely.

If we use the s&p 500 index for stocks and corporate bond index (investment grade) for bonds, which of the two would be more likely to go to zero?

Thank you
AWH_CPA
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Re: Hypothetical chance of bond or stock index going to zero

Post by AWH_CPA »

I think they are both just as likely to happen. The reason being the entire US economy needs to blow up for either to happen. If the US economy blows up then both happen. Hence each have an identical chance of happening.
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nisiprius
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Re: Hypothetical chance of bond or stock index going to zero

Post by nisiprius »

In the study by Dimson & al of 23 national stock markets from 1900 to the present, two of them, Russia and China, had stock markets that went to zero, and their bond markets went to zero as well. That is to say, the country experienced a total financial and political collapse and the end of its financial markets.

In another thread I said that based on those statistics, over a 40 year investment period, there was about a 3% chance of experiencing such an event.

The Confederate States of America issued bonds, which they defaulted on. I haven't been able to find out if the CSA had either stock market or a bond market, but I am thinking not.
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tludwig23
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Re: Hypothetical chance of bond or stock index going to zero

Post by tludwig23 »

All of the 500 largest companies in the U.S. would have to fail over a short period of time for this to happen. Didn't happen during the Great Depression, didn't happen in Weimar Germany. I'm going to say to probability of both is zero (excluding events which would wipe out most human life on earth, such as nuclear combat, toe to toe with the Russkies).
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JoMoney
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Re: Hypothetical chance of bond or stock index going to zero

Post by JoMoney »

In some ways of looking at it, they both go to zero every Friday afternoon in the U.S.
While I could theoretically go to my neighbors house on Saturday evening and draw up a contract and sell him my rights for whatever he was willing to give me for my shares, I have a feeling I wouldn't like the offer he was willing to make.
If the belief was that the public markets would not re-open on Monday morning, and that the stocks may not be liquidated for some unknown amount of time, he may not be willing to offer anything for them. The need for liquid cash to meet living expenses may over-ride the desire to buy stocks no matter how cheap I was willing to sell them.
Bonds on the other hand have a requirement to pay out a certain coupon payment at regular intervals, typically monthly. I think someone somewhere might be willing to buy bonds at some price knowing that they're fairly certain to get some cash back at the end of the month.

If every company suddenly went through bankruptcy proceedings, bond holders are first in line to get paid something out of whatever assets remain of the companies.

If every company was suddenly nationalized and some sort of communist style economic system took over without private ownership, both the stocks and bonds would likely be worthless.

I have no idea how someone would determine the probability of something like any of the above happening.
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ourbrooks
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Re: Hypothetical chance of bond or stock index going to zero

Post by ourbrooks »

Well, suppose the current trend for companies to go private continues, to the point where only new companies issue publically traded stock and S&P quits issuing the index. Private companies might still want to issue bonds, though. This is not such a far fetched scenario; in 1998 the Wilshire 5000 index had 7,562 companies; now it has 3,666.
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JoMoney
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Re: Hypothetical chance of bond or stock index going to zero

Post by JoMoney »

ourbrooks wrote:Well, suppose the current trend for companies to go private continues, to the point where only new companies issue publically traded stock and S&P quits issuing the index. Private companies might still want to issue bonds, though. This is not such a far fetched scenario; in 1998 the Wilshire 5000 index had 7,562 companies; now it has 3,666.
I think there are market forces that would prevent it from going entirely one way or another. If there is a demand for "public companies" the price in the public markets will rise to a point that private owners will likely sell out and go public. Conversely, when public companies look cheap relative to potential cash flows, or if a private owner thinks they can add value with their direction or some unique partnership there will be a demand to take the companies private where the new owners can control and direct the business in a manner that they feel would be more beneficial.
Some big "private equity" groups are public firms, and a lot of smaller firms (both public and private) get bought out by large public firms.
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k66
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Re: Hypothetical chance of bond or stock index going to zero

Post by k66 »

I'm not sure you can really assign a probability to something this ( a major market and thus it's index as well) going extinct. To know the correct likelihood of success or failure of an understood system in the future is built on knowing the history of success or failure of the same system in the past. Nisi's examples notwithstanding, we have no history of the SP500 failing.
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ccieemeritus
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Re: Hypothetical chance of bond or stock index going to zero

Post by ccieemeritus »

Radio shack is not even at zero yet. But I'm sure it feels like zero for those who have 99.6% losses.
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