While U.S. stock market indexes hit new all-time highs, the Japanese stock market is also hitting new marks.  The Nikkei hit an all-time high last week, finally beating the high reached in late 1989.  That’s right.  It only took a little over 34 years.

It could be said that Japan has its own bubble, especially given its debt-to-GDP ratio that makes the wild spenders in the U.S. Congress look conservative by comparison.  The Japanese government has finally gotten the inflation it wanted, and it brought stocks to new highs.

Perhaps the business cycle in Japan is just running a bit slower than in the United States, which is like Mr. Toad’s Wild Ride.  Japan’s last major stock bubble happened 3 and a half decades ago, which is at least a generation.

It’s not that every time an asset hits a new all-time high that it is in a bubble.  But when it is driven by a policy of loose money and artificially low interest rates, the distortions tend to point to it being unsustainable in the long run.

You have to wonder if there are people who bought near the top of the market in Japan in 1989 and have held on this entire time without selling.  It would have had to have been someone relatively young.

Of course, it’s not as if a lot of people put a lot of money in stocks right at the top of the market without investing at any other time.  So we shouldn’t make it sound as if every investor from 1989 in Japan is a loser.  Maybe they bought a lot of shares after it plummeted.

Still, it calls into question the whole strategy of buy and hold.

Buy and Hold, For How Long?

There are many financial advisors and media personalities who give the advice to buy low-cost index funds and to hold them for a long period of time.  Some even advocate that all or most of your investment money should go into mutual funds.  They say that the market always goes up in the long run.

And I suppose Japan has just proven that to be true.  In the long run, stocks do go up, especially in our world of fiat currencies.  But just how long are you supposed to wait?

Warren Buffett is considered by many to be the greatest investor of all time.  He probably is.  But Buffett doesn’t advocate that others do what he did.  Buffett got incredibly wealthy by buying solid companies that he researched for long-term growth.  This isn’t really the advice Buffett gives to others.  He just says to buy an index fund and hold it.

Up until now, Buffett’s advice has generally been sound.  He says he is long on the U.S. economy.

But what about Japan?  It’s not as if Japan is some third-world country.  In fact, in the 1980s, people were saying that the Japanese were going to overtake the U.S. economically.

Imagine someone who invested in the Japanese market in 1989 who was 45 years old.  Now they would be close to age 80.  And the market just finally got to where it was in 1989?

When people say to buy and hold for the long run, how long are you supposed to wait?  Are you supposed to base your retirement plans on this long run?

Can It Happen Here?

Americans think it can’t happen here.  There have been stock crashes, but the market always seems to recover relatively quickly.

In many ways, there are a lot more problems in the United States now than there were in Japan in 1989. Japan wasn’t trying to run a world empire back then.

The same thing probably won’t happen in the U.S. only because the central bank will resort to greater money printing (digitally speaking).  Still, the example of Japan shows what is possible.

Even if the U.S. market went down by 50% and stayed down for half as long (17 years), how many people would be financially devastated?  How many people would have to come out of retirement?  How many people would have to delay retirement by many years?

You don’t have to listen to the conventional advice and put most of your money in stocks.  There are options, such as the permanent portfolio.  Buying mutual funds is only diversification as compared to buying individual stocks.  But most stocks tend to move up and down together as an asset class.  You can diversify in different asset classes.  The hardcore stock investors in Japan in 1989 should have at least diversified into bonds.