Black Monday. The dot-com bubble. 9/11. The Financial Crisis. COVID-19. Whatever last year was. That covers about the last 30 years of market crashes. It’s an exhausting list. And as an investor, it’s exhausting to be told to stay the course. I get it.
When will this stop? My bold prediction is: never. This is how the world works. Babies are born. The population expands. The demand for goods and services expands along with it. The line isn’t straight, but it goes up and to the right.
Each time the markets experience a shockwave, it seems like the system is on the verge of collapse. Eventually, however, we’re all reminded that investment returns from stocks are closely related to the demand for products and services from our fellow humans. Needless to say, the number of humans on the planet has been increasing rapidly for many centuries, and that trend is not likely to reverse in the foreseeable future.
Stock market prices are tethered to the earnings generated by each stock’s respective company. As long as there is demand in the aggregate for what companies are selling, companies will grow. When companies grow their revenues and earnings, their stock becomes more valuable over time.
Does thinking this way make you a “perma-bull”? Maybe. A perma-bull believes the market will always go up in the end, regardless of what temporary interruptions to growth occur. And perma-bulls, at least as long as stock exchanges have existed, have always won in the end. So maybe it’s not the dumbest thing to be.
When we remind clients that it’s always best to bet on the market over the long term, regardless of short-term volatility, some of the most concerned among them express doubt.
Below are some of the most common expressions of angst that we hear, as well as our responses. These responses are an attempt to explain why we recommend what we do and how we think as investment advisors:
“I know that the market has always recovered, but it’s different this time. The world has gone completely nuts. The government is inept. I don’t want to be a sucker.”
I couldn’t agree more. It is different this time. But to be fair, it’s different every time.
On 9/11, the world changed forever. Afterward, the stock market and economy went on to break new records. Then, when the housing crisis/financial crisis hit seven years later, it was different again. Just like the COVID-19 shutdowns 12 years after that.
Each time, the market recovered and set new records. Why? Because the companies that make up the overall market were making more money than they ever had before, which is what fundamentally drives stock prices. During every crisis in the past 100 years, humans (in the aggregate) kept having babies. Consumers continued to multiply.
The media loves to focus on the negative and present it in a way that would give anyone pause when it comes to a long-term investment strategy. That’s what glues viewers and generates ratings. So, don’t be a sucker! If we all took investment advice from the news media, we’d miss many of the great market surges that occur after a period of uncertainty. See below:
“Until we get a president who knows what he’s doing, the stock market is in trouble.”
In reality, the president has little control over the stock market. If I asked 100 people to rank the last five presidents by stock market performance during their time in office, I’d bet less than 10 of them could guess correctly. That’s because the factors that determine stock market performance over a four- or eight-year period have little to do with the popularity or competence of any one person, even the president.
(If you’d like to quiz yourself on a presidents’ ranking, here’s a fun interactive tool.)
“The government has printed so much money that we can’t possibly repay the debt. The country is going bankrupt.”
The U.S. government’s balance sheet should never be compared to your household budget or finances. Unlike your household, the U.S. Department of the Treasury not only has the ability to borrow money at a massive scale, but it has an obligation to inject funds into the economy based on economic conditions and laws passed by Congress. You don’t have to agree with the laws, but that’s a different issue.
Today, U.S. debt is around 129% of our annual GDP.i That’s higher but not much higher than it was after World War II. The U.S. is fortunate to be considered a safe place to park international funds (by purchasing our debt), so we have long enjoyed “good credit” in the international community.
As a comparison, Japan currently has debt of around 240% of its annual GDP, and they do not enjoy the reserve currency status of the U.S.ii
This is not to say that debt is necessarily a good thing. But the U.S. has only run a surplus for multiple consecutive years, paying down the national debt during seven periods going back to the 1800s.iii In each instance, a depression or severe economic downturn followed.
This seems to suggest that reducing debt levels does not have the impact on our economy one might expect. It certainly isn’t analogous to what an individual household might experience after paying down debt. The impact for the U.S. is much more nuanced and should not directly inform investment decisions.
Inflation levels should be the real indicator of short-term stock market headwinds or tailwinds. State fiscal policies are another matter since states can’t “print” their way out of budget woes. Since the pandemic, many states actually report surpluses.
Government waste has always been present. While I’d encourage political activism for those concerned with government debt levels, it’s “pork” and waste, not the overall dollar level of debt, that should concern the average taxpayer.
“I know that it’s unusual for the market to have two consecutive down years in a row, but maybe that’s just considering the last few decades. In the ’70s, nobody made money in the market. What if that happens again?”
It certainly could happen again. That’s why we’re proponents of the 4% rule. You should aim to save enough money by the time you retire so that you don’t need more than 4% of your portfolio each year to supplement your income needs.
In most market environments, you would be safe withdrawing more than this. In most historical scenarios, you wouldn’t run out of money during your lifetime by withdrawing 5% or even 6% per year. However, because a decade like the ’70s is always possible, we espouse 4% as a target.
If a decade like the ’70s happens while you’re still accumulating, you’d be fortunate to have 10 years to purchase shares at relatively low prices. If it happens during retirement, a low withdrawal rate will have already accounted for that possibility. Either way, it isn’t something to fret over if you are following sound guidelines.
“The world is different than it was 20 years ago. Some of the things I’m reading about artificial intelligence are truly alarming. How will kids even take exams at school? What if this puts everyone out of work?”
It will put people out of work. It will also create jobs.
When the internet burst onto the scene in the ’90s, it disrupted the business model of many companies and put some out of business. Like the railroad, radio, and television, it was a game-changer.
Artificial intelligence will no doubt be another game-changer. It will also cause bad things to happen, just like the smartphone has almost certainly increased the suicide rate for teens. It will cause great things to happen too, just like the internet has lifted millions out of poverty across the globe. Change is scary for all of us. But we must always recognize both sides of a double-edged sword.
While new technologies may require activism and involvement in our school systems and in our laws and regulations, it is not a reason to abandon long-term investment strategies. In our view, that’s the only way to really expose yourself to major underperformance and put your long-term goals at risk.
“You always say the same thing. There isn’t anything that could stop you from continuously recommending buying stocks for long-term investors.”
That’s almost true. Actual cataclysmic events and doomsday scenarios include things like global thermonuclear war or a “Handmaid’s Tale”-style sterility of the human race. Those are the two scenarios that would have me abandoning stock market investing.
In either scenario, the situation would be so dire that priorities would shift to day-to-day survival and away from achieving good risk-adjusted returns in a diversified portfolio. Given that logic, it’s never wise to invest for fear of global annihilation. It’d be a bit like keeping an emergency fund for when the sun explodes. If it happens, the money won’t do you or anyone else any good.
Always bet on survival in case it happens. That’s when the money will come in handy.