The investment markets are playing tricks on the average investor.  Perhaps they are even tricking the professionals.  I’m afraid that some buy-and-hold investors are going to get a very difficult lesson in the coming years.

Some investors are too young to have ever experienced a true bear market in stocks.  Let’s take someone who is 30 years old (born in 1994).  When the 2008 financial crisis hit, this person was only around 14 years old.  When I was 14, I wasn’t paying any attention to financial markets or investments.  I was more concerned about what my friends were doing that afternoon and when my next basketball game was taking place.

Since 2008/ 2009, we haven’t had a bear market.  Maybe we technically had one in 2020, but the Federal Reserve was already at the start of creating trillions of dollars in new money before lockdowns ever began. The down market lasted about 2 months and stock indexes were hitting new highs before the year was over.

This was not a true bear market.  Maybe it fit the technical definition of one, but it was a false bear market experience.  It wasn’t a bear market where investments got absolutely hammered and there was negative sentiment that was widespread for a long period of time.

Even the 2008/ 2009 bear market turned around relatively quickly, but at least it was for a good solid six months.  Stocks hit their low in March 2009, but things were quite negative at that time.  Plus, the housing bust had a couple of more years to go before it bottomed out.

Even for those who are older, 2008 was a long time ago.  It was 16 years ago.  Americans tend to have a short memory.  They certainly have a short memory when it comes to politics.  There may be a few people out there who have the scars from 2008 if they lost their house in foreclosure or they were just about to retire with a big stock portfolio.  But for the vast majority, 2008 is a distant memory that didn’t greatly impact where they stand today.  And if it did, they probably didn’t take away a lesson to diversify out of the stock market.

Will the Next Downturn be so Kind?

We have had a few rough days on Wall Street more recently.  There was panic for a couple of days, and then stocks went back to just going up.  There has been more volatility, but the Dow and S&P are near all-time highs.

I follow the FIRE movement somewhat closely.  That stands for Financial Independence, Retire Early.  Many people in the FIRE movement advocate a buy-and-hold strategy in low-cost mutual funds or ETFs.  They say that stocks always go up in the long run.

The strategy of buy-and-hold index funds does not have to be a characteristic of FIRE or FI.  It just so happens that many of the leaders in the movement are advocates of this strategy.  You can still have the goal of FIRE or FI without using this investment strategy.

I have heard and seen comments from this community about the recent activity in the stock market.  I have seen similar comments repeated about staying the course.  I have seen people say that they waited out the little blips down and their portfolio is now up above where it was before.

But again, they are judging based on a tiny down move of around 5% or so over the course of a few days. This isn’t anything like seeing a 70% drop over the course of a couple of years.  These people are in a false sense of reality.  They think every time the market ticks down that it will just pop back up, and then they can share their wisdom on social media.

I’m afraid some of these people are going to be near suicidal if we ever have a hardcore bear market that lasts for several years.  Their entire basis for living seems to be on their wisdom and perseverance to hold index funds through the bad times and to watch how rich they will get later on.

I think most FIRE/ FI people will be better off if and when a major downturn happens, at least financial speaking.  They are smart not to have debt outside of a mortgage and they have money saved, even if it isn’t diversified.  Many Americans barely have any savings.  So even if stocks go down by 70%, you can still look at it that 30% of something is better than 30% of nothing.  It is the mental toll on these people that I worry about.

J.L. Collins and His Meditation

There is a video (or audio) of J.L. Collins helping people through a downturn in stocks.  Collins is one of the unofficial leaders of the FIRE community, and he certainly has a soothing voice.  He has this recording that is like a meditation session.  It is designed to calm you down when the storm hits and to ride out the storm without panic selling.

He reassures you that everything will be ok.  He tells you that this is just a temporary downturn and to stay the course.  In many ways, it is brilliant.

The only problem is, what if he’s wrong?  What if this isn’t temporary?  What if stocks don’t always go up?  What happens if it ends up like Japan where the stock market is lower today than it was at its peak in 1989?  Is 35 years considered temporary?

If we have a stock market crash of 70% that lasts several years, this is going to absolutely devastate the plans of many millions of people.  Even a crash of 50% will take a major mental toll on people.

Young Americans and Americans with a short memory have become accustomed to market rebounds for the last 16 years.  They think a drop of 10% is big, and they think it goes back up in a short period of time.  They have been correct up until now.  They will continue to be correct until they aren’t any more.

If you want to not lose sleep over your investments and also not live in a false reality, try something like the permanent portfolio.  There are no guarantees with anything, but it seems to be a lot safer than going all-in on stocks.