Originally Posted by Dean2
That is not impossible. Highly unlikely, but not impossible. It is why you NEVER keep 100% in one bucket. You need to have GICs/Bonds and real estate in addition to stocks. You have to make sure that if your stock portfolio went to zero, and the dividends stopped, you can still live until the prices recover. However, even in 1929, most of the quality companies did in fact survive just fine and the share prices came back up.
Those that worry about a 1929 style crash might find this interesting.
You may have heard that it took 25 years for the stock market to recover during the Great Depression. I’ve heard it and simply accepted it as truth, until today. It’s true that the Dow Jones Industrial Average (DJIA or just “Dow”) peaked at 381.17 on September 3rd, 1929. It is also true that the DJIA did not reach that level of 381.17 again until November 23rd, 1954. That is a span of over 25 years.
However, as this 2009 NY Times article by Mark Hulbert explains, that’s not the whole story when you dig a little deeper.
[…] a careful analysis of the record shows that the picture is more complex and, ultimately, far less daunting: An investor who invested a lump sum in the average stock at the market’s 1929 high would have been back to a break-even by late 1936 – less than four and a half years after the mid-1932 market low.
The truth is that it took about 7 years for an investor to recover (1929-1936), even if they invested all their money at the very peak. This came 4.5 years after the Dow hit its period low of 41.22 in the middle of 1932. Why?
Dividends. Back then, dividend yields were much higher. The absolute dividend payout did not drop nearly as severely as the prices. When the Dow hit a low of 41.22 on July 8, 1932 (that 90% drop you’ve read about), the dividend yield was close to 14%.
Deflation. “The Great Depression was a deflationary period. And because the Consumer Price Index in late 1936 was more than 18 percent lower than it was in the fall of 1929, stating market returns without accounting for deflation exaggerates the decline.” Every dollar actually bought significantly more in 1936 than in 1929.
Human misjudgment. The DJIA is composed of 30 stocks, which are picked by humans to represent the broad market. According to this article, a total of 18 companies were swapped in and out of the DJIA between 1929 to 1932. That was the highest number of changes to the Dow ever in such a short amount of time. This was a stressful time, and the Dow committee often “sold low” and “bought high” when picking companies to remove and add.
The Great Depression was still an extraordinarily painful time with minimal social safety nets, followed closely by World War II. I recommend reading The Great Depression: A Diary by Benjamin Roth for a vivid picture of what it felt like to live through the Great Depression.
In normal times the average professional man makes just a living and lives up to the limit of his income because he must dress well, etc. In times of depression he not only fails to make a living but has no surplus capital to buy stocks and real estate. I see now how important it is for the professional man to build up a surplus in normal times.
Even today, how many are prepared for the stock market to go down for 2.5 years and then take another 4.5 years to get back to even?
[5/9/1932] Those men who were wise enough to sell during the boom and then keep their funds liquid in the form of government bonds, etc. were not farsighted enough or patient enough to wait almost three years to re-invest. Most of them re-invested a year or more ago and now find stock prices have sagged to 1/3 of what they were when they thought they were buying bargains.
Still, 7 years is very different than 25 years. Imagine being 50 years old and your IRA contribution at 25 years old is still underwater! The worst time period for stock market returns was actually 1972-1982, when it took roughly 10 years to recover if you invested at the peak:
[…] according to a Hulbert Financial Digest study of down markets since 1900, the average recovery time is just over two years, when factors like inflation and dividends are taken into account. The longest was the recovery from the December 1974 low; it took more than eight years for the market to return to its previous peak, which was reached in late 1972.
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