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

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

Post by Northern Flicker »

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.
You can read about the history of market crashes here:

https://en.m.wikipedia.org/wiki/List_of ... ar_markets

The US market has always recovered from crashes, but there are no guarantees of a recovery and no prescribed timeline. Some of us believe that we should be able to weather an event like an economic downturn, job loss, the market dropping 50-60%, and taking years to recover. Those of us who believe that probably were not 100% stock once retirement portfolios had more than a few years of savings in them.
My postings are my opinion, and never should be construed as a recommendation to buy, sell, or hold any particular investment.
JackoC
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Re: How big is the risk of sustained huge stock market decline?

Post by JackoC »

alpine_boglehead wrote: Thu May 06, 2021 11:49 am 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.
I'd though split those four things (including 'investors realizing they paid too much...') into, basically, exogenous (first two) and endogenous (second two) to the financial system. I believe that poring over graphs of US stock returns in the last 100 yrs may be of limited use in predicting the endogenous ones but basically no use for the exogenous ones. IOW the fact the US was on the winning side in WWII has no bearing on the likelihood of it losing (or the perhaps very far reaching consequences of visibly backing down to avoid) a war over Taiwan. Whereas you *might* hypothesize that the frequency of 'normal' more financial system endogenous events like the mortgage crisis is somewhat indicative of the future frequency. People are the same (at least prior to serious bioengineering in the future perhaps), so 'bubbles' will be somewhat the same and occur with somewhat the same frequency...maybe.

However overall I find graphing the past, such a mainstay of this forum, to be mainly useless to determine the frequency or size of future tail events. It's just not a very big data set. Concluding probabilities from 'rolling' IOW autocorrelated 30 yrs period is statistical nonsense: there are only 3 independent samples of 'what the US stock market does over 30 yrs' in the last 90 years. Mainly I believe you expect to be compensated in return for holding stocks in part for tail events you *cannot* predict the magnitude or likelihood of, besides also for the 'normal' ups and downs some people have more stomach for than others. But again IMO if you can't get by (*get by*, not flourish) with an 80%* stock market drop followed by mediocre returns for some decades, the plan is too risky. But to each his own.

*the low point of the S&P in early 2009, adjusted up by the increase in CPI since, is right around 80% below the current index level. Is there some magic floor or ratchet function that says it can't revisit that level? I don't see what the reasoning would be to think that. But I have no idea how likely it is.
RXfiles
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Re: How big is the risk of sustained huge stock market decline?

Post by RXfiles »

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.
Tune out the noise. Set you AA based on your risk tolerance. People have been saying that for the entire last decade yet it kept in going.
Robot Monster
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Re: How big is the risk of sustained huge stock market decline?

Post by Robot Monster »

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
Japan's market stayed crashed for the twenty year period, and it was just a money problem. Please witness for yourself the crash in 89, and how long it stayed down...

Image
galeno wrote: Thu May 06, 2021 10:43 am Yep again.
Please see above.
"I think we may see a return to full employment next year." -- Janet Yellen, March 23rd 2021
csan
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Re: How big is the risk of sustained huge stock market decline?

Post by csan »

SteadyOne wrote: Wed May 05, 2021 8:40 pm 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.
Would you count the 2019 inversion as a correct signal?
DB2
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Re: How big is the risk of sustained huge stock market decline?

Post by DB2 »

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.
This guy says the S&P will hit at least 6000 over the next couple of years and will be followed by the largest crash since The Great Depression. He explains why.

https://seekingalpha.com/article/440421 ... -pay-piper
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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 12:28 pm
Japan's market stayed crashed for the twenty year period, and it was just a money problem. Please witness for yourself the crash in 89, and how long it stayed down...
Robot Monster,

How does this helps the minority that was massacred by the police in a certain Asian country during the Asian Currency Crisis?

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

Post by alpine_boglehead »

JackoC wrote: Thu May 06, 2021 12:19 pm Mainly I believe you expect to be compensated in return for holding stocks in part for tail events you *cannot* predict the magnitude or likelihood of, besides also for the 'normal' ups and downs some people have more stomach for than others.
This exactly. So, when the market gets ahead of itself and values stocks only for the coming gilded age and not for all the bad things that also have some probability of happening, that's asking for trouble. Because some bumps in the road will always occur, not even speaking of a major problem. And bad things do happen - Bill Bernstein's Retirement Calculator from Hell gives us an exact 19.983% probability of disastrous stuff happening in our lifetime.

Thus I would like stocks to be priced conservatively. However, currently it looks like the market doesn't grant me my wish. Staying the course, though.
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galeno
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Re: How big is the risk of sustained huge stock market decline?

Post by galeno »

Great post.
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.
KISS & STC.
59Gibson
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Re: How big is the risk of sustained huge stock market decline?

Post by 59Gibson »

watchnerd wrote: Thu May 06, 2021 11:33 am
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.
I think what was being discussed would be far worse than 2000 yr cohort. The 2000-02 downturn gets overhyped. The brutal damage was concentrated in tech/Nasdaq. If you were trading or overweight many dotcom stocks you got crushed..A balanced 60/40 or 70/30 fund did not take that great of hit and 2003-07 were decent claw back years before 08-09. It certainly hasn't been a cakewalk for 2000 and the last 11 years have completely saved them. It didn't have to happen that way.
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Re: How big is the risk of sustained huge stock market decline?

Post by Robot Monster »

KlangFool wrote: Thu May 06, 2021 12:36 pm
Robot Monster wrote: Thu May 06, 2021 12:28 pm
Japan's market stayed crashed for the twenty year period, and it was just a money problem. Please witness for yourself the crash in 89, and how long it stayed down...
Robot Monster,

How does this helps the minority that was massacred by the police in a certain Asian country during the Asian Currency Crisis?

KlangFool
Alas, my help can only go so far.
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SteadyOne
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Re: How big is the risk of sustained huge stock market decline?

Post by SteadyOne »

csan wrote: Thu May 06, 2021 12:30 pm
SteadyOne wrote: Wed May 05, 2021 8:40 pm 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.
Would you count the 2019 inversion as a correct signal?
I did. I stopped dividend reinvestments and stopped contributing to stock funds. It took ten month after and COVID was unexpected of course, so the decline was much more severe than I anticipated. But it helped somewhat. And interestingly as always there were plenty of claims in the press after the inversion that this time is different and it will not necessarily lead to market decline.
“Every de­duc­tion is al­lowed as a mat­ter of leg­isla­tive grace.” US Federal Court
mikejuss
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Re: How big is the risk of sustained huge stock market decline?

Post by mikejuss »

Your asset allocation should be set at a ratio that enables you to stomach a downturn. It sounds, at present, as if yours is not. Look into that. :idea:
stocknoob4111
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Re: How big is the risk of sustained huge stock market decline?

Post by stocknoob4111 »

It will eventually crash like it always does but my personal take on it is that there is still too much pessimism about the market and the euphoria is not sufficient to call this a top. If we end the year at SPX 5000 then I would be worried. At the moment no, the market is overvalued but not close to euphoria.

Also doing a peak to peak comparison I see no red flags - peak 2000 to current - CAGR 7%
peak 2007 to current - CAGR 10.2%

nothing out of the ordinary, contrast this will the 80s bull on the Nikkei which was CAGR 28%
JBTX
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Re: How big is the risk of sustained huge stock market decline?

Post by JBTX »

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.
To the extent you have a significant international allocation, it reduces the risk of a prolonged portfolio decline. Japan investors who had market weight of international would have fared much better...not great but much better.
Robot Monster
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Re: How big is the risk of sustained huge stock market decline?

Post by Robot Monster »

JBTX wrote: Thu May 06, 2021 7:02 pm
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.
To the extent you have a significant international allocation, it reduces the risk of a prolonged portfolio decline. Japan investors who had market weight of international would have fared much better...not great but much better.
"The performance of Japanese financial markets since 1989 is also an argument, of course, for a 60/40 portfolio of equities and bonds. During the worst periods of performance, investors would have enjoyed a roaring multidecade bull run in fixed income: The FTSE Japan Government Bond Index has returned more than 170% to investors since the bubble burst." link
"I think we may see a return to full employment next year." -- Janet Yellen, March 23rd 2021
garlandwhizzer
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Re: How big is the risk of sustained huge stock market decline?

Post by garlandwhizzer »

The future is not only unknown but also unknowable no matter who is making the prediction. Bear in mind that all predictions regardless of source are merely guesses. The market seems to take pleasure in sometimes humbling all predictors including its most intelligent and well prepared experts. Having said that, the following is my guess. I think the risk of a huge stock market decline that is sustained for more than 5 years is exceptionally low, so low that it should not the dominant force in choosing your asset allocation unless you are extremely rich and can thrive long term with the zero to negative inflation adjusted long term investment returns which is what "safe assets" currently offer.

There is no way to avoid risk in investing if you require significant positive real returns to meet your financial goals. The question is which risk bothers you more--an unlikely equity market collapse that may last for a decade or more (very unlikely), or running out of money when you're old and unemployable (more likely IMO). Each of us must set that balance at a level appropriate to their own situation. IMO don't look for a cookbook answer to tell you how to do it. The cookbook answer may turn out to be more flawed than yours. Know yourself and your financial circumstances well and do what makes sense.

There is no question that the stock market, bonds, real estate, etc., are very overvalued by historical standards. We are however living in an age that has never existed before--zero or negative real interest rates for more than a decade, incredibly massive QE and fiscal stimulus, and in spite of all that, sluggish growth for 14 years that many expect to improve substantially in the near term. That conjunction of events has never before occurred in US history or any other country's history as far as I know. Historical measures of valuation have been thrown out the door. The market is overvalued but it is hard to accurately define by how much. Investors are now expecting robust future profit growth near term as we emerge from Covid and the economy reopens,. Investors have already priced that expected future good news into current valuations.

Market expectations for future corporate profit growth are currently very optimistic, perhaps too much so. On the other hand, where else are you going to put your money? All US quality investment assets may be overpriced but that can last for decades. There is an incredible amount of money concentrated in the investing class in the US, all of it looking for a place to go that's not overvalued and yet has good future prospects. That's why there are few if any such stocks now. They were bought long ago. There are two backstops that work in equity investors favor no matter how high valuations get: the FED with unlimited financial resources, and the incredible amounts of money that have to be invested somewhere.

There is a very remote possibility that could cause a long term market train wreck--persistent, substantial, and increasing inflation over a long period of years. It appears that the odds against that are overwhelming as Powell stated and the overwhelming majority of investors believe. Strong secular forces (aging demographics, globalization, tech innovation increasing efficiency, massive debt worldwide, etc.,) are expected to cap inflation after a modest upsurge this year. All governments in the developed have been trying with every tool they have to create inflation for 14 years, Japan for 3 decades, and none have thus far have succeeded.

I believe portfolio moves to consider at this time include significant international equity exposure and modestly overweighting value stocks which relative to growth darlings look more sanely valued. Possibly a small allocation to GDX, a leveraged play on gold which to date I have not done. Value and INTL will benefit if the global economy starts growing robustly which is expected to happen. If you want real gains long term diversified stocks are IMO still the best instruments to use as they always have been. Just don't expect a replay of the incredibly great gains we've had over the last 4 decades. If the future merely rhymes with the past that will be enough.

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

Post by Yesterdaysnews »

Nice post. I tend to agree that market crashes rarely occur when everyone is screaming about it…. The market climbs a wall of worry. It’s inevitable but nobody knows when and I would bet it will come out of the blue.
WhiteMaxima
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Re: How big is the risk of sustained huge stock market decline?

Post by WhiteMaxima »

When I invest in stock market, I already prepared for potential 40-50% decline. Because I know I am going to invest in the long haul like 20-30 years. a decline market is a good opportunity to dollar cost average. Actually, majority of my investment is accumulated during the dot.com burst and 2007 housing bust and I am still DCA. While I am approaching retirement, I will start to be more conservative by move away from equity to fix income.
Northern Flicker
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Re: How big is the risk of sustained huge stock market decline?

Post by Northern Flicker »

stocknoob4111 wrote: Thu May 06, 2021 3:33 pm It will eventually crash like it always does but my personal take on it is that there is still too much pessimism about the market and the euphoria is not sufficient to call this a top. If we end the year at SPX 5000 then I would be worried. At the moment no, the market is overvalued but not close to euphoria.

Also doing a peak to peak comparison I see no red flags - peak 2000 to current - CAGR 7%
peak 2007 to current - CAGR 10.2%

nothing out of the ordinary, contrast this will the 80s bull on the Nikkei which was CAGR 28%
The market doesn't care about any of that. It may go up further, it may be a sideways market for 30 years, or it may crash. The past is the past. How we got to this point doesn't matter. Future unpredictable events will drive the market either way.

One useful method is to assume any random day can be the start of a 50% drop in stocks (because any random day can be the start of a 50% drop) and hold a portfolio whose behavior is acceptable if stocks drop 50%. Typically this means deciding on the maximum acceptable drawdown of the portfolio and doubling that. The resulting percentage is the maximum percentage of stocks to hold.

Thus, if a 40% drop in portfolio value is acceptable, then being 80% stock will maintain that as long as stocks don't drop more than 50% (which they did in the 2008-2009 and 1929-1932 bear markets).
My postings are my opinion, and never should be construed as a recommendation to buy, sell, or hold any particular investment.
Small Savanna
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Re: How big is the risk of sustained huge stock market decline?

Post by Small Savanna »

There are two separate risks: the risk that the market will go down, and the risk that it will force you to change your lifestyle or your retirement plans. You can't do anything about the first risk, but you can do something about the second risk. Focus on how to insulate yourself from a big dip through some combination of the following:

1. Staying employed and having work skills that make you employable
2. Having a spouse who is employed or employable
3. Picking an asset allocation that you won't regret when the big dip happens
4. Living below your means and having a financial cushion
5. Having part of your retirement income from a pension or other source not tied to the market
6. Paying off the mortgage before you retire
Fat Tails
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Re: How big is the risk of sustained huge stock market decline?

Post by Fat Tails »

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.
+1. Good information.

One method to assess risk is the following formula:
Risk=Probability x Consequence

One cannot change the probability component. One changes the consequence component by changing your stock asset allocation to a level allow one to weather a market decline without have to sell stocks at a large due to income needs or panic selling.

Klangfool’s approach to have large cash assets to draw from is a great tool to avoid selling at a loss for income requirements.

Most people do not have a good understanding of their risk tolerance.

There are scenarios when both stocks and bonds could decrease in value at the same time, such as a sovereign bond default or as simple as an increase in interest rates.

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

Post by firebirdparts »

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.
This is false. The 70's, overhanging into the late 60's and early 80's had a sustained "lack of production" let's say. 2000 to 2009 did not have any sustained declines, that should be obvious to anybody.
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3funder
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Re: How big is the risk of sustained huge stock market decline?

Post by 3funder »

123 wrote: Wed May 05, 2021 4:28 pm 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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+1
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Re: How big is the risk of sustained huge stock market decline?

Post by LateFire »

Financial markets are inherently risky. There is no risk-free return.
Dunning-Kruger cognitive test: People think they are more capable than they really are. Sufferers don't know how much they don't know, and the most ignorant are the most confident.
Jags4186
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Re: How big is the risk of sustained huge stock market decline?

Post by Jags4186 »

firebirdparts wrote: Fri May 07, 2021 9:43 am
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.
This is false. The 70's, overhanging into the late 60's and early 80's had a sustained "lack of production" let's say. 2000 to 2009 did not have any sustained declines, that should be obvious to anybody.
What is false? A decade of investing where your money returned negative real returns is a sustained decline. Between 2000 and 2009, 4 of the 10 trading years were double digit negative real returns. Between 1970 and 1979 5 of the 10 trading years had a negative real return.

In the 2000-2009 period, an investment in the SP500 only spent 25 out of 120 month end periods with more money than you had on Jan. 1, 2000. And of course it ended up 10% lower at the end of it all.
Nathan Drake
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Re: How big is the risk of sustained huge stock market decline?

Post by Nathan Drake »

seajay wrote: Thu May 06, 2021 11:31 am
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)
Uncle Jack said to only buy the US haystack though!
mikejuss
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Re: How big is the risk of sustained huge stock market decline?

Post by mikejuss »

Nathan Drake wrote: Fri May 07, 2021 10:20 am
seajay wrote: Thu May 06, 2021 11:31 am
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)
Uncle Jack said to only buy the US haystack though!
Are you suggesting a stock-picking approach to portfolio-building?
Jags4186
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Re: How big is the risk of sustained huge stock market decline?

Post by Jags4186 »

mikejuss wrote: Fri May 07, 2021 10:44 am Are you suggesting a stock-picking approach to portfolio-building?
I think he’s suggesting there is a place for international equities. Although that graph isn’t that helpful as I don’t know anyone who does a 4% withdrawal rate with 100% equities. A 60/40 portfolio would have ended up at $733k year end 2009, and a 30/30/40 portfolio would ended up at $852k.
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Re: How big is the risk of sustained huge stock market decline?

Post by mikejuss »

Jags4186 wrote: Fri May 07, 2021 11:02 am
mikejuss wrote: Fri May 07, 2021 10:44 am Are you suggesting a stock-picking approach to portfolio-building?
I think he’s suggesting there is a place for international equities. Although that graph isn’t that helpful as I don’t know anyone who does a 4% withdrawal rate with 100% equities. A 60/40 portfolio would have ended up at $733k year end 2009, and a 30/30/40 portfolio would ended up at $852k.
My thoughts exactly...
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Re: How big is the risk of sustained huge stock market decline?

Post by Toons »

Enjoy the "Moment"
Keep Investing







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

Post by Nathan Drake »

mikejuss wrote: Fri May 07, 2021 10:44 am
Nathan Drake wrote: Fri May 07, 2021 10:20 am
seajay wrote: Thu May 06, 2021 11:31 am
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)
Uncle Jack said to only buy the US haystack though!
Are you suggesting a stock-picking approach to portfolio-building?

Just being sarcastic

I suggest a well diversified portfolio including international, and some tilts to value (SCV) if you can stomach the volatility

I think holding only an S&P 500 exposure in equities can be sub optimal and exposed to prolonged flat or negative performance as the data and graphs indicate
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Re: How big is the risk of sustained huge stock market decline?

Post by warowits »

stocknoob4111 wrote: Thu May 06, 2021 3:33 pm It will eventually crash like it always does but my personal take on it is that there is still too much pessimism about the market and the euphoria is not sufficient to call this a top. If we end the year at SPX 5000 then I would be worried. At the moment no, the market is overvalued but not close to euphoria.
Is there a reason we have to have euphoria prior to a crash, or does sentiment just prior to a crash just always look euphoric when looking back from the depths of a crash?

I think that watching for euphoria is really about seeing how much money is still on the sidelines. This time, because of T.I.N.A., I suspect we can have pessimism AND all our collective money in the market. With PE ratios greater than the dot com bubble, I think everyone should be pessimistic.
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Re: How big is the risk of sustained huge stock market decline?

Post by Corsair »

Fed is trapped, they can’t allow even a moderate market downturn. QE being permanent. They’ve tried to taper before and always reversed course. Yellen was talking about the Fed buying stocks last year and they’ve crossed the “line” buying corporate and junk bonds.
All posts are my own opinions and are not financial advice.
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Re: How big is the risk of sustained huge stock market decline?

Post by stocknoob4111 »

@Corsair Fed has been trapped before.. like in the 70s.. ultimately Volcker had to do what had to be done and the result wasn't very pretty

we are not there yet but I feel its coming...
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Re: How big is the risk of sustained huge stock market decline?

Post by watchnerd »

Corsair wrote: Fri May 07, 2021 11:45 am Fed is trapped, they can’t allow even a moderate market downturn. QE being permanent. They’ve tried to taper before and always reversed course. Yellen was talking about the Fed buying stocks last year and they’ve crossed the “line” buying corporate and junk bonds.
I'm not banking on this.
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Re: How big is the risk of sustained huge stock market decline?

Post by retiringwhen »

J295 wrote: Wed May 05, 2021 5:39 pm 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.
If my memory serves me well, those are not too far off the average for the last century. Although 4 year recovery is on the long side.
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Re: How big is the risk of sustained huge stock market decline?

Post by retiringwhen »

Nathan Drake wrote: Fri May 07, 2021 11:24 am I suggest a well diversified portfolio including international, and some tilts to value (SCV) if you can stomach the volatility

I think holding only an S&P 500 exposure in equities can be sub optimal and exposed to prolonged flat or negative performance as the data and graphs indicate
Correct, a healthy dose of Total Bond had a much nicer result that decade far outperforming the stock market. Diversification works.
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Re: How big is the risk of sustained huge stock market decline?

Post by Northern Flicker »

Jags4186 wrote: Fri May 07, 2021 10:09 am
firebirdparts wrote: Fri May 07, 2021 9:43 am
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.
This is false. The 70's, overhanging into the late 60's and early 80's had a sustained "lack of production" let's say. 2000 to 2009 did not have any sustained declines, that should be obvious to anybody.
What is false? A decade of investing where your money returned negative real returns is a sustained decline. Between 2000 and 2009, 4 of the 10 trading years were double digit negative real returns. Between 1970 and 1979 5 of the 10 trading years had a negative real return.

In the 2000-2009 period, an investment in the SP500 only spent 25 out of 120 month end periods with more money than you had on Jan. 1, 2000. And of course it ended up 10% lower at the end of it all.
I agree. But it also is the case that if you change your decades to 1968-1977,... 1998-2007, ...

you will see different results.
My postings are my opinion, and never should be construed as a recommendation to buy, sell, or hold any particular investment.
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Re: How big is the risk of sustained huge stock market decline?

Post by Robot Monster »

Northern Flicker wrote: Sat May 08, 2021 5:20 pm
Jags4186 wrote: Fri May 07, 2021 10:09 am
firebirdparts wrote: Fri May 07, 2021 9:43 am
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.
This is false. The 70's, overhanging into the late 60's and early 80's had a sustained "lack of production" let's say. 2000 to 2009 did not have any sustained declines, that should be obvious to anybody.
What is false? A decade of investing where your money returned negative real returns is a sustained decline. Between 2000 and 2009, 4 of the 10 trading years were double digit negative real returns. Between 1970 and 1979 5 of the 10 trading years had a negative real return.

In the 2000-2009 period, an investment in the SP500 only spent 25 out of 120 month end periods with more money than you had on Jan. 1, 2000. And of course it ended up 10% lower at the end of it all.
I agree. But it also is the case that if you change your decades to 1968-1977,... 1998-2007, ...

you will see different results.
Which can be easily seen in this wonderful visualization of the S&P's past performance. Courtesy of the New York Times, from 2011...

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

Post by RAchip »

I always chuckle when some expert says stocks are “overvalued.” Stock prices at any given time are simply the price that produces equilibrium between supply and demand. The term “overvalued” is simply a guess that at some point in the future supply will go up and demand will go down (or some combination of those).

If you look at history to make your guess about the future, stock market prices in modern history (the last 100 years) are basically a straight line up from lower left to upper right. All fluctuations have been minor and temporary.
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Re: How big is the risk of sustained huge stock market decline?

Post by David Jay »

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

Post by cashboy »

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

Post by GaryA505 »

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.
Your calculation must be off. I got 41.738259351
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Re: How big is the risk of sustained huge stock market decline?

Post by GaryA505 »

retiringwhen wrote: Fri May 07, 2021 1:59 pm
Nathan Drake wrote: Fri May 07, 2021 11:24 am I suggest a well diversified portfolio including international, and some tilts to value (SCV) if you can stomach the volatility

I think holding only an S&P 500 exposure in equities can be sub optimal and exposed to prolonged flat or negative performance as the data and graphs indicate
Correct, a healthy dose of Total Bond had a much nicer result that decade far outperforming the stock market. Diversification works.
Actually, all we know is that it has worked in the past.
"Get most of it right and don't make any big mistakes."
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Re: How big is the risk of sustained huge stock market decline?

Post by dogagility »

Sustained? Huge?... Not likely enough for me to worry about.
The more flexibility you have the less you need to know what happens next. -- Morgan Housel
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Re: How big is the risk of sustained huge stock market decline?

Post by munemaker »

Charlie Munger: 'I Think It Must End Badly but I Don't Know When'

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

Post by Exchme »

So in the last hundred years or so, events have conspired to cause this three times, plus the decades leading up to 1922 were similarly challenging. So history might say a 2-4% chance each year, but they generally were reacting to a unique set of major world events and who is to say when those might happen.
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Re: How big is the risk of sustained huge stock market decline?

Post by TheDDC »

This is why we say: VTSAX/VTIAX and chill. Ignore the other forums.

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

Post by BuyAndHoldOn »

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.
I completely agree; it's just hard in the low (no) yield environment.
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