Stock Losses Are a Real Setback Even Though One Day Prices Will Recover

Stock prices will recover. They will return to where they were before they crashed and eventually rise to new highs. This is the story that Buy-and-Holders tell investors who are worried about suffering losses. No! It’s your money on the line. Do not fall for the trickery!

It is technically accurate to say that prices will recover and eventually go on to new highs. The U.S. economy has for 150 years been sufficiently productive to support an average long-term stock return of 6.5 percent real. The price direction is always upward. Not to worry.

No – wait! Worry! Worry plenty!

Waiting for stock prices to recover

You only have so many years to build a portfolio large enough to finance your retirement. Say that you begin investing at age 25 and plan to retire at age 65. That’s 40 years. That’s all you’ve got. When the Wall Street Con Men tell you that prices will recover, they don’t tell you how long it is going to take. Say that it takes 10 years. That’s 25 percent of the time available to you to build up a retirement account. If it takes 10 years for you to get back to where you were before the crash, you’ve lost big time. There’s no way for you to get those years back.

And the compounding! The Wall Street Con Men talk all the time about the magic of compounding returns. They are right to do so. A large portion of your retirement stash is going to come not from amounts that you saved but from compounding returns on those amounts. If it takes 10 years for you to get back to where you were before prices crashed, you lose 10 years of compounding. That’s devastating. An investor in those circumstances has suffered a terrible setback.

If it were true that market timing didn’t work, then it would just be one of those things that you have to live with. Stocks are a great asset class. So you don’t want to avoid stocks. But of course market timing does work! So you can take a bit off the table at times when the risk of a long-lasting price crash is high and put a bit extra on the table when the likelihood of above-average long-term returns is high. That’s what you should do.

Of course!

I worry that I am insulting your intelligence when I say some of the things I say. Losses are real. Gee, who’d a thunk it? But you know what? The jizz-jazz about how prices always recover is repeated so often by so many different people that it comes to saturate the brains of lots of people who are capable of making purchases of all sorts of things other than stocks in perfectly intelligent ways. I say these things because I want to buck you up when you start to experience doubts as to whether stock losses are not such a big deal.

When it’s your money being lost, it’s a big deal. It’s nice that prices will recover. But you would be better off suffering smaller losses in the price crash so that you would have more money invested in stocks when prices recovered. So many things are upside down in the investment advice field. Please don’t ever fall for the one about how price crashes aren’t so bad because prices always recover. Losses are bad. Bad. Bad. Bad. Bad. Bad. Always. No exceptions. Anyone trying to persuade you otherwise is working a con. Run, don’t walk.

Small losses now and again are a necessary part of the game. The only way to avoid occasional small losses would be not to invest in stocks and that would be a dumb thing to do. So you should not permit yourself to be alarmed by those sorts of losses. But you should keep focused on the CAPE value at all times. The CAPE tells you what you need to do to avoid the terrifying losses that have made stocks a scary investment choice for as long as we have had a stock market. The terrifying losses are optional in the post-Shiller era.

Don’t let your guard down on the grounds that the market will eventually recover and then go on to new highs. You want to avoid losses to the extent possible. Duh!

Rob’s bio is here.