Random Walker wrote: ↑Fri Jan 24, 2020 4:36 pm
I’m 57 years old and started investing for real in about 1996. I frequently tell people that between the tech bubble/crash 1996-2002, the financial crisis 2007-2008, and the real estate bubble/crash 2006-2008, that I’ve seen a lifetime’s worth of investing history in a decade. I’ve accumulate over the years, am closer to retirement, and am way more worried about losses. I’m curious how these big market events have affected others? I’ve become keenly aware that one would need to make 100% to recover from a 50% decline and make 50% to recover from a 33% decline.
For these reasons I’ve taken on the goal of hyperdiversification in addition to increasing the bond allocation with age. I diversify with factors, geographies, styles, alternatives, and safe bonds.
I wonder if many saw the “V Shaped Recovery” after 2008 and assume all recoveries will be so easy? Just stay the TSM course, or die others make adaptations?
Equity markets are risky, there will be crashes and panics, that is why there is a premium for investing in equities. This knowledge is what we need to have even before we invest in equities, once armed with the history of the bubbles and panics worldwide over five hundred years, we are prepared to face it when it comes our way.
Here is a list of crashes and panics worldwide: https://en.wikipedia.org/wiki/List_of_s ... ar_markets
Once you learn about the Tulip Bulb mania, the South Sea bubble, the Great Depression, and the Japanese stock market history, you are prepared.
Since I knew this history, I was expecting the real estate crisis and financial crisis of 2006-08 and 2008, it didn't go as low as I expected, about 50% while I was expecting it go as low as 80%, and a slower recovery over 10 years, but we had a quick recovery, so much that by 2010 there was no trace of it.
That hasn't changed anything for me, because I am still expecting equities could drop 80% in a serious crisis, that doesn't prevent me from invested in equities heavily. That is why there is a premium. If there wasn't the risk of 80% losses, there would not have been gains of over 200% in the last decade in S&P 500.
Investing in stock markets worldwide historically hasn't been always as positive as investing in US Equities in the late part of 20th century and early part of 21st century, notwithstanding these intermediate crashes. Consider that London Stock exchange was in existence since 1500, and average returns were possibly anywhere from 5% to 7% (unverified), with massive run ups in 1800 followed by massive crashes. The UK FTSE 100 has gained a respectful 6.7% including dividends over the last 25 years or so. The S&P 500 gained over 11% since 1985. This is not expected to happen always, you may not see returns like this in US market over the next 50 to 100 years. It could be similar to to 5% to 7% returns like world wide, or even lower.
What could we do? Stop investing in equities, or go after high cost complex alternative investments with even lower returns and lower chance of success? go into bonds and cash with expected returns below inflation?
None of those are good alternatives. So we keep investing in equities and keep expectations lower. We keep a rainy day fund allocation, and a comfortable fixed income allocation as our safe money that we cannot afford to lose. The rest is risk we take for higher growth, and if history is of any indication, it has higher success rate than any other alternative. No guarantees obviously.