February 13

What Happens When the Market Doesn’t Bounce Back?

Challenge Investment Paradigms


“Over time, the stock market will always go up!”


As a financial advisor, that was the platitude I spouted to comfort clients.

I had a couple of go-to statistics to attempt to “prove” this statement:


  • I first demonstrated that the market realized a positive average annual return over any 15-year period (the added text in the graphic below reflects my current concerns).
  • Then, I would show how much our human emotions impede our investment success, encouraging clients to simply “set it and forget it” (again, I added the additional text to challenge what once seemed so clear).

Convinced? My clients were. I was too, for that matter.

Then again, it was never difficult to convince a client that the “right thing” was to stay in the market no matter what. Financial pundits preach this absolute rhetoric ad nauseam.

To this point in our nation’s history, the increasingly frequent and volatile bust-then-boom cycles devastate investors as they panic – exiting the market on the way down only to reenter on the way back up – and miss much of the recovery. Advisors often use sad stories to this effect (usually concluding with an old retiree driven back into the workforce to make ends meet) to quell our investment anxiety.

Thus far, this advice has proven itself prudent; if you had stayed calm and in the market, you would likely be better off today.

But will that always be the case?

I, for one, have repented of this dogmatic investment philosophy, to which I once subscribed blindly. I don’t believe less-than-100-year stock market data is sufficient to deduce the full scope of possibilities.

Is less-than-100-year stock market data sufficient to deduce the full scope of possibilities?

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I’m afraid I helped perpetuate this false sense of long-term security in those I was attempting to serve.

However, the fact that mindlessly staying in the market would have proven lucrative throughout the history of our nation – through numerous corrections, recessions, and depressions – will attract many experts unable to see it any other way.

That is, until it is far, far too late.

It isn’t hard to imagine how they would react if the stock market were to drop by 50%. “Stay the course,” they would say. “History proves it’s the right thing to do in a precarious situation like this.”

Your trusted financial advisors, too, coached in what to say and pumped full of the same Kool-Aid, would provide words of comforting wisdom during these troubling times, just as I used to.

Side note: of course! If they advised you otherwise (to take your money out of the market), they would have no money to manage and consequently be out of a job. Beware the moral hazard.

What would you do?

Let’s take this seemingly bizarro scenario one step further. Imagine the market never recovers during your lifetime. What if the market stayed below that 50% cut for decades to follow?

You were 30, 45, or 60 (whatever, all devastating) when it began its descent. You waited for it to come back. You were “strong” and “responsible.” You stayed the course. You believed your financial advisor’s rules-of-thumb, waited for the “8% average annual market return,” and relied on their “4% safe retirement withdrawal rate.”

But this time they were wrong…

…and here you sit, 30 years later, surrendered to a new paradigm: “On occasion, albeit rare, the market might not go back up in a lifetime…”


Absolutely not.



How can we be so confident in modern portfolio theory? Are we so secure and comfortable as to not at least prepare? Is this idea such a stretch as to warrant disregard?

Forget the depressing hypothetical then…

Let's examine the past

The Japanese economy was booming in the 1980’s. The 1989 book, The Japan That Can Say No: Why Japan Will Be First Among Equals, encapsulates the zeitgeist of this era for the Japanese.

On December 29, 1989, the Nikkei 225 (like our S&P 500) touched its all-time high of 38,957.44. The following few years brought with them the scenario posited above.

“Stay the course; wait for the inevitable rebound,” was the absolute wrong advice. For that proverbial retiree, this clichéd wisdom would have proven her financial downfall.

Even today, almost three decades later, after falling over 80%, the Japanese market remains under its halfway mark (as of this writing).

Almost three decades later, after an 80+% drop, Japan’s market remains under its halfway mark

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The financial pundits of today can (and do) provide you with all the reasons the United States is different. Why they (the pundits) are more intelligent than the authors of The Japan That Can Say No (the then Minister of Transport for Japan, later Governor of Tokyo for over a decade, and the co-founder of Sony), and why United States citizens have no need to fear or question.

I hope those pundits, too, decide to publish a book to immortalize their own zeitgeist in the annals of history.

So, When Will the Sky Fall?

Studying the world presents one with a surfeit of causes for concern (all subjects to be explored in future posts): from Fed incompetence driving the dollar to potentially indomitable inflation, to kurtosis risk manifesting itself through increasingly frequent so-called “black swan” events, and so on.

I suspect the common disclosure found in most investment prospectuses – that “past performance is no guarantee of future results” – will ultimately turn out more prescient than the authors ever intended.

Despite these depressing realities, I find myself dumbfounded as economists (and otherwise intelligent human beings whom I respect) attempt to assign a date to this inevitable “collapse.”

Although it may sound this way, I am not prophesying the downfall of American markets (or any market, for that matter).

I am definitely not pontificating as to a particular date.

One would be remiss to discount the ingenuities and machinations of the powers that be. It is their financial wizardry throughout the ages that has almost always found a way to kick the can down the road, at least until they are dead (…or out of office).

One would be remiss to discount the financial wizardry and machinations of the powers that be

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What Can You Possibly Do About It?!

It is, in fact, the unpredictable and confusing nature of today’s unique financial variables that drives my core investment philosophy.

I am not a champion of head-in-sand, cash-under-mattress, doomsday financial strategies.

I am an advocate of prudent asset stewardship.

It doesn’t hurt to prepare (read: your portfolio can still realize substantial growth).

The US stock market is not your only, nor should it be your primary, investment option. It should be one of many. Other viable diversification vehicles include (but are not limited to):

  • International markets (stock, bond, etc.)
  • Physical real estate (domestic and international)
  • Entirely uncorrelated alternative strategies (managed futures, market neutral, etc.)

(But since this is a blog and not a book, we will explore them all in detail in future posts.)

To learn more about some alternative investment strategies, find my book on Amazon.

A parting thought

Simple strategies can make a life-changing difference if indeed a never-before-experienced scenario plays out.

Simple strategies will be life-changing if indeed there is a never-before-experienced scenario

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Consider your portfolio

  • How would it have held up in post-1989 Japan?
  • How would that have affected your goals and vision for the future of your loved ones?
  • Has your financial advisor at least discussed some of these potentialities with you?

Let me know your thoughts

  • Is it possible for the S&P 500 to rise ad infinitum and guarantee forever-positive returns over any 15-year period?
  • Am I just crazy, or do many experts seem to be missing something?
  • What will you do (have you done) to protect your portfolio while maintaining competitive growth?

About the author 

Stephen Spicer

Stephen Spicer, CFP®, AEP®, CLU® is the founder and managing director of Spicer Capital, LLC. He is married to his high school sweetheart, and they have three amazing boys.

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