Last edited Sun Mar 21, 2021, 11:37 AM - Edit history (1)
indexes as being "safe", then yes, they are "safe". My definition of safe is probably a little different.
The best known blue chip index (the Dow 30 Industrials) fell 89% from peak to bottom in the Great Depression, and it took 25 years to get back to their 1929 peak. The worst individual stocks in that collection of 30 did much worse. (And the best individual stocks did much better).
Then it took 16 years for the Dow to regain where it was in 1966. Again, the worst individual stocks in that index did much worse. (And the best individual stocks did much better).
The S&P 500 did a little better in that period -- for example, in November 1968 the index stood at 108.37. Nearly 14 years later, in August 1982, it stood at 101.44. Again, the worst individual stocks in that index did much worse. (And the best individual stocks did much better).
A foreign example: The Nikkei 225 fell from 38,916 on 12/29/1989 to 7,055 on 3/10/2009, an 82% decline, and, after more than 31 years still has not gotten back to its 1989 peak. Again, the worst individual stocks in that index did much worse. (And the best individual stocks did much better).
There is a meme circulating that since 1970 in the U.S., one only had to wait 7.5 years or less for the S&P 500 to recover, because we've learned to control these things now. And as for them Japanese -- well they are different, you know what I mean wink wink (They also, at least post-WWII, have never elected an obviously evil madman or had their legislature overrun by a mob, so I'm not sure being "different", wink wink, is a bad thing).
I remember the same thing being said about collateralized debt obligations in the 2000's -- there had never been a time since the Great Depression when the U.S. overall average housing prices went down, so because the CDO's were geographically diversified, we didn't have to worry our pretty little heads off about frothy housing prices. Because a U.S.-wide housing price drop never happened (ahem, since the Great Depression) so it never will because we are so much more sophisticated than we were back then. (Its a contradictory combination of looking to history for validation, while at the same time saying things are different now)
The trouble with memes is that enough people start believing them, and use them to justify ever higher valuations. Now we're in the "you just have to wait 7.5 years or less in the worst case to get back your money" memedom, to justify ever higher P/E ratios. That cycle will eventually come to an end, and great cycles rarely end gently.
As far as the meme about the S&P 500 recovering in 7.5 years or less after 6 bear market crashes (pullbacks of 20% or more), that's not a very statistically strong argument, being based on a sample size of 6. And it applies to a collection of 500 stocks. It most certainly does not apply to any individual stock -- again, indivdual stocks are more volatile than the aggregate of a large collection of stocks.
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