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Many people advise that one should invest money in indexes like the S&P 500 because they always grow in the long term.

Is it possible that the S&P 500 could fall to its early 1990s level? What situation could cause that?

Should I be afraid making a long-term investment (15-20 years and more)?

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  • A similar question was asked last month, and some of its comments refer to the Japanese crash of 30 years ago. money.stackexchange.com/questions/134024/… As for whether you should fear it, we can't answer that. – RonJohn Jan 20 at 20:26
  • Anything is possible but the chances of the S&P 500 losing over 85% of it's value is negligible. Only a catastrophic event like nuclear war could lead to that. Long term rampant inflation could be destructive but again, 85+ pct devaluation has a slim chance of occurring. – Bob Baerker Jan 20 at 21:45
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    This type of risk analysis is only meaningful when you compare it to something else. What is the alternative? Putting it in a mattress? Investing in Bitcoin? Buying Beanie Babies? Bob Hope trading cards? All of those have risks, the real question is which one fits your risk profile. – JohnFx Jan 20 at 21:58
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    Even if it did fall that much tomorrow, it would only mean that the "long term" you were looking at wasn't long enough :-) But leaving out the collapse of western civilization, human extinction due to global warming, or the sun going nova, you're pretty safe, at least if you're long-lived. – jamesqf Jan 21 at 4:08
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    I feel that the answer to this question should be a straightforward examination of the history of major dips to the major stock markets - their (a) frequency (b) length (c) depth. I don't think anything is served by generalizations. – Fattie Jan 21 at 17:57
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Is it POSSIBLE? Of course. It's possible that aliens will invade tomorrow. It's even possible that a politician will tell the truth some day. Is it LIKELY that the S&P will plummet to 1990s levels? Not very.

In 1990 the S&P was running at around 340. Today it is around 3,800. Could it fall by 90% in the new few weeks? Yes ... but not very likely.

Historically, the stock market has always gone up in the long term. Is that a 100%, iron-clad guarantee that it will do so in the future? Of course not. But it's a pretty safe bet. Even in the worst stock market crash in US history, 1929, the Dow Jones returned to its 1929 high in 1954. And if you adjust for the deflation that happened during the 1930s, the Dow had recovered by 1936. (https://www.livemint.com/Money/Oww1BVK1roWvXRUCd0VjIJ/25-years-to-bounce-back-from-the-1929-crash-Try-fouranda.html)

For the stock market to fall 90% would require a major economic collapse. There would almost certainly be massive unemployment, thousands of businesses large and small going bankrupt, and millions of people suddenly thrown into poverty. There would probably be rioting in the streets. In such a situation, losing value from your retirement fund would probably not be the top thing on your list of worries.

Smaller losses are more realistic. During the early 2010's my retirement fund lost value several years in a row. Not 90%, more like a few percent a year, but steady losses year after year.

In any case, is this a reason not to invest in the stock market? I'd say, what else are you going to do with your money? Are you going to invest in real estate? That could plummet to. Gold? Ditto. If you're really worried that civilization is going to collapse, maybe the smart thing to do would be to buy land in some remote place, build a bunker, and stock it with non-perishable food, medicine, and ammunition. But then if civilization does NOT collapse, that would turn out to be a pretty poor investment.

Every investment is a gamble. All you can do is make your best judgement of what you think is likely to happen in the next few years or decades, consult experts, etc.

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Yes. Period. There is no possible other answer because you say "hypothetically". Hypothetically it is POSSIBLE it goes to 0. Possible is not likely. You formulated the question in a way that has only one valid answer.

What situation can cause that?

How long you want the list to be? From "asteroid impact" to "religious civil war" to "communism making all stocks evil and taking them".

Should I be afraid of it if I do long-term investment (15-20 years and more) or in such situation I lose my money anyway?

That is illegal to answer as investment advice is illegal here.

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  • While you were writing your answer, I was editing the question. If you don't mind, edit your answer if doing so has caused a misdirection. – Bob Baerker Jan 20 at 20:25
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    That's not investment advice, it's psychological advice. Besides, the Nikkei-225 crash of 30 years ago is a good example of how a market can crash. – RonJohn Jan 20 at 20:29
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    Illegal is not correct. I think you may have have looking for the word forbidden. – Ben Voigt Jan 20 at 21:20
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    I am unsure about the possibility of the S&P going to 0, even in theory. It is defined as the index with the 500 largest (by market capitalization) companies and if companies disappear they will be swapped out. While there are some requirements for eligibility such as minimum market capitalization, there would probably be changed if there were not enough stocks fulfilling these requirements – Manziel Jan 21 at 8:40
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    You still assume the absence of a culture ending event o r a religious revolution making public property illegal. Agreed, both are comically unlikely, but then, the question is about hypothetically, not realistically. – TomTom Jan 21 at 10:58
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Let's try to make a realistic and practical answer without invoking extreme hypotheticals.

Let us address the three sentences in the question:

Many people advise that one should invest money in indexes like the S&P 500 because they always grow in the long term.

Any people who literally said that are fools.

There are two separate, specific, and important reasons they are fools:

  1. Major markets often plummet for a few decades. The example usually given is the Nikkei which went directly downwards from 40 thousand to 10 thousand for 20-30 years...

enter image description here

See the horror here: link

  1. People who talk about "long term" ignore the remarkable reality that humans die. The notion that something will be "just fine" in 30 years is an astonishingly facile comment, for a 40 or 50 year old human.

Indeed, in the Nikkei example it did in fact recover ... after right on 40 years. So, if you were 40 years old and you invested - great news! - when you are 80 years old your money has got back to precisely where it started (that's nominal money, not even considering that inflation has made it worth nothing).

Is it possible that the S&P 500 could fall to its early 1990s level? What situation could cause that?

The story of the S&P is that

  1. it traded around 500
  2. it had two ENORMOUS spikes around 2000, and then
  3. the overwhelming economic feature of the world is that from the 2nd of March in 2009 (Monday right?) the S&P has had a staggering, amazing, world-historic run up from around 500 to today's values .. a run-up of about 6x.

enter image description here

As if needed, here I indicate the run-up:

enter image description here

If you arrived from Mars ...

Say you arrived from Mars this afternoon. Like any alien, your only interest is trading the markets. You have to report to home base with a summary of Earth. Your summary would be:

"So, the S&P ran up 6x from Monday in 2009 through today."

That's all you'd say.

Everything else is: trivia. You wouldn't mention oil, wars, the invention of the internet, Tom Brady being the goat, or anything else. You'd just say "So, the S&P ran up 6x from Monday in 2009 through today."

So what happens next?

Whenever there's a run-up there's a pullback. End of story.

Pullbacks are usually half the runup. But whatever, it might be "merely" 30% or maybe 70%.

This means ............. you face an incredible problem.

Ouch. What's the problem?

The issue "Whenever there's a run-up there's a pullback" creates the most difficult problem in life.

You have two approaches:

  1. Assume that the pullback is coming. Sensibly don't invest, because you could lose your money at a stroke!

  2. Jump on, it is obviously and clearly going up, so jump on.

Two total disasters to choose from...

And there's the rub.

You're "damned if you do and damned if you don't."

With option 1: the S&P could easily double or triple again. There's absolutely no way to know "where we are" in the runup. If you miss the double, you have missed literally the one chance in your life for a double. You have completely, utterly, blown your whole life investment story.

With option 2: the pullback could start tomorrow, at, let's say, 11:25. So in 10 years folks will say "How interesting, the S&P has gone straight down since Friday Jan 22 at 11:25. Wow, if you invested your money at 11:24, you would feel really suck just now."

Both options are a complete nightmare.

Should I be afraid making a long-term investment (15-20 years and more)?

  1. The run-up has lasted since that Monday for 11ish years now. Pullbacks are usually shorter than runups (they are more violent, faster).

  2. Will there be a recovery after the pullback? Yes. (Just as with even the Nikkei ultra-disaster.)

  3. When will the pullback happen? Utterly unknowable. Could be tomorrow or 10 yrs from now. It's perhaps reasonable to guess "some time" in the "coming 10 years".

  4. So after the pullback, when will it have recovered?

There's the rub. Your question ...

Should I be afraid making a long-term investment (15-20 years and more)?

... is simply equivalent to asking "will the coming pullback-recovery of the S&P be over and done with by 20 years from now?"

If you look at the Nikkei example, "you're screwed". Conversely, you can find many other examples where the "waiting period" in major market pullbacks is more like 15 years in total.

To copy and paste for a summary:

Your question ...

Should I be afraid making a long-term investment (15-20 years and more)?

... is equivalent to asking "will the coming pullback-recovery of the S&P be over and done with by 20 years from now?"

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I'm gonna give a second answer, a direct and specific answer to the sense of the actual headline question:

enter image description here

"Will the S&P fall to early 1990s levels?"

Answer,

No,

pullbacks are typically half the runup.

If the pullback comes tomorrow, the S&P will fall to about 2000.

If the S&P runup continues to (pick a number) 8000, the pullback will be to about 5000. And so on.

So no: the pullback following the current runup will not be to about 500.

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    Past performance is no guarantee of future results. – Bob Baerker Jan 21 at 15:49
  • @BobBaerker 15 to 20 years is such a long perspective that it's utterly impossible to predict with any reasonable accuracy. Past performance not being a guarantee of the future result is as useful saying as "we should learn from history" - history tells us that probably the pullback will not be to 1990 levels. This really infuriatingly stupid saying about past performance should instead be that "nothing is certain". – mishan Jan 21 at 16:22

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