What If Stocks Never Go Up Again?

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Analysis of these issues routinely ignores the very real possibility that the very nature of money and profit as we know it is ending. I believe we may be transitioning to a barter economy where skills, networking and community interdependence will replace a monetary marketplace.
Upskilling in basic life-sustaining tasks such as food preservation, gardening and building relationships with people who live within walking distance might be as wise an investment as spending hours trying to visualize the profit-making potential of a future without consumer cash.

Rick of WA 9:43AM February 19, 2009

Anyone can put out an infinite number of "what if" scenarios. No one can predict the future because of unpredictable random occurrences. WWII and deficit spending cured our Great Depression, not government programs. Who could predict 9/11? Just a month or so ago, oil was supposed to go to $200 a barrel. Eight years ago, we were looking at government "surpluses as far as the eye can see." During the dot com boom, people were looking at the Internet as the "next big thing." Just as the US government set policy for national phone service last century, national broadband Internet service will probably become the new dial tone. Hedge funds and retail mutual funds redemptions exacerbated the current market drop.
IOW, all this doom and gloom is completely unwarranted. Yes, we are probably in for relatively bad time for the next 5 or 10 years because people spent a lot more money than they could pay back. But no one can predict what industries or products will excel or even exist during that time. Look at the billion-dollar industry that grew up around the Ipod.

jimmy of MD 9:05AM January 06, 2009

Excellent article. Yes, the 9-10% projections that financial planners show their clients are junk. Index funds are high risk investments and highly correlated with each other. Instead investors should be shown a range of projections that makes it clear that even ten years from now they may have less money in a fund than they put in. And 2008 has shown that most diversification across equity classes (i.e. US, foreign, REIT, etc) is a largely a myth.
There are some strategies that are potentially useful. One is to add market neutral investments. These investments are created by gaining exposure to other factors in the market such as the value and size premium, momentum premium, and option volatility premium. They are somewhat complex to create and involve derivatives.
Also remember that the S&P 500 is biased towards large growth stocks, which essentially means that you're long equities but short the value and size premium. This is one reason why the S&P 500 has not performed well historically except in the 1990s. You're much better off in smaller companies. Individually they are riskier but collectively they provide higher returns, because some of those small firms grow into or are acquired by large firms. The S&P 500 is more reflective of the return that institutional investors get because they cannot move into and out of smallcap stocks easily.
The second strategy is to use hedging. If you can't handle a 35% loss in your investment portfolio within the next five years then the only responsible choices are to either withdraw your assets from the market or to hedge the risk. The price of hedging fluctuates, and you may be able to buy a long-term hedge cheaply at times when the market isn't focused on risk. At other times you could set up a zero-cost collar that limits both your upside and downside or use a spread position in which you buy one hedge and sell another. The short-term price of a hedge also gives you valuable information about the market's opinion of risk going forward.
The third strategy is to automatically rebalance. Most investors leave their assets in appreciated investments and get crushed when the inevitable happens. Simply regularly rebalancing assets across sectors in the S&P 500 provides better risk-adjusted performance than the S&P 500 alone. (Note that rebalancing helps more by reducing risk than boosting return.) Rebalancing across bonds and market neutral investments can allow you to regularly move some of your investment profits out of the market before it corrects.
--- Tristan Yates, author of Enhanced Indexing Strategies

Tristan Yates of MD 11:46PM January 05, 2009

Invest in stocks that pay them - Doesn't matter if they ever go up

joe of NY 9:54PM January 05, 2009

As a result of this recent downturn, it has become 'fashionable' to praise the fact that social security was not privatized. I believe that is short sighted. In fact, our Social security fund is gone, because the government has been paying its bills with our money and paying less than 2% interest for that pleasure. Over the last 70 years, had 'the people' been able to invest some of their own retirement money then their accounts would not be empty, and even though the market is down, we would be far ahead of the paltry 2% annualized gain. The only reason the politicians don't want to let you invest some of your own social security assets is that they want to spend it for you.

M Higgins of FL 9:38PM January 05, 2009

The old line that stocks increase by 100% or average 10% every year not including inflation can't be applied to the future. No one knows anything about the market anymore. Just spend everything saving enough for only only six months let the government pay when you fall on bad times. Don't pay any income taxes! The government has totally screwed us.

nobozons of CO 8:01PM January 05, 2009

I am no economist, so I have a question. We all seem to assume that inflation is inevitable, and certainly preferable to deflation. A perfectly stable currency is probably impossible, but why must we assume that it must fall in value (buying power) over the long term? Where is (was) this "gain" by "growth" in the stock market really coming from? Is it possible that "creating" monetary "value" out of thin air (not based on real work) is the reason for inflation, and so is inherently bad for any economy? Shouldn't we be trying to stamp it out, not find a way to "profit" from it, as others lose? Or am I completely missing something here?

Stan of AL 7:41PM January 05, 2009

I followed the "count on the stock market to double and triple our money through compound interest over a lifetime" for 30 years with a diversified portfolio that was well-balanced and a medium risk. I retired in January with being close to my goal for retirement and then saw it all go out the window in six months. What will I do? Fool me once, shame on you. Fool me twice, shame on me. I will watch for the short recovery and then cash out, take my losses and put it into a low interest paying savings account where I can trust my small town local bank to invest my money in safe loans. I will no longer trust the big banks or big business. The major problem is the Republican administration allowed big business and the super rich to monopolize and control everything and we small town middle class people are the losers. The "what if" doesn't really make any difference for me. I don't have time to recover my losses and wait on the stock market to recover. Wish I could claim my losses like big business will be able to do.

John of LA 7:27PM January 05, 2009

Government should assume the commanding heights of the economy and take absolute care of all of us. Yeah, that's the ticket.

Randy of 7:24PM January 05, 2009

buy and payoff a house and car, lower property taxes so I can retire in my house with my car. I can save enough to eat and vacation with a 4% return, though health care would probobly still be a problem. Oh, maybe the kids can help!Back to the future we go!

grumpy old man of OH 5:28PM January 05, 2009