What If Stocks Never Go Up Again?

Potential scenarios don't paint a pretty picture.

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UPDATE: My response to those who call this question ludicrous is now posted here.

It's a scenario that would undermine every personal finance book, market expert, and business school class out there: Such a prolonged recession -- or even depression -- that the market never gives investors the 10 percent average returns of the 20th century. Or even less-optimistic 8 percent returns.

If we can no longer count on the stock market to double and triple our money through compound interest over our lifetimes, then what will we retire on? How will we stay ahead of inflation? Most people now lack pensions and depend solely on social security, tax-protected retirement account such as 401(k)s, and private savings. But if those latter two sources don't grow in the stock market, we're all going to be feeling pretty poor as we enter our retirement -- if we're even able to retire.

This doomsday scenario becomes even more drastic when one considers how our behavior might change. If we can't earn as much on our savings, then will we become even less likely to save? Personal finance books love to talk about the power of compound interest as a primary incentive to save instead of spend. Their authors often base their arguments about how many thousands you will ultimately save by cutting out that daily latte, for example, by assuming you can grow those savings at ten percent a year. But with the stock market down some 40 percent in 2008, that assumption isn't looking so solid. You would have been better off buying all the lattes you could handle last year rather than put that money into the stock market. (Of course, you'd be even better off if you'd stored that money in a high-interest savings account instead.)

Today's Wall Street Journal reports on the efforts of money managers to develop new models for current market conditions. Possibilities include a moderate recovery, prolonged period of sluggish growth, sharp rebound, depression, and a period of inflation. In other words, the chances of a quick return to 10 percent gains are slim.

So what is the solution for those of us worried about what we'll be able to live off in our retirement? Financial experts are soon going to need to come up with a better answer than compound interest. Any ideas?