Forty years ago, on August 13, 1979, after a decade of dismal stock returns and punishing inflation with interest rates soaring, things were looking bleak. So bleak, in fact, Business Week published its famous “Death of Equities” issue.
“This ‘death of equity’ can no longer be seen as something a stock market rally—however strong—will check. It has persisted for more than 10 years through market rallies, business cycles, recession, recoveries, and booms” (Business Week 8-13-79).
Well, it turns out Business Week blew this call. Equities (stocks) still had a pulse in 1979, and they revived and compounded wealth at a furious rate through the 1980s, 1990s, and 2010s. Here are Dow Jones Industrial Average (DJIA) market closes at the proclaimed “date of death” and 10-year anniversaries:
August 13, 1979: 875.26
August 13, 1989: 2,683.99 (3.1x)
August 13, 1999: 10,973.65 (12.5x)
August 13, 2009: 9,398.19 (10.7X)
August 13, 2019: 25,896 (30X)
“History Doesn’t Repeat Itself, But It Does Rhyme” -Mark Twain
Aside from the obvious lesson that financial journalists and other prognosticators don’t always get it right, I see three important points here:
Markets work. Given time, stocks build wealth. It’s often darkest just before the dawn, but patience and discipline have been rewarded in investing. How many investors after dealing with the pain of the 70s took Business Week’s lead and folded?
Plan for the best and prepare for the worst. Long and trying periods of poor stock market performance are an expected part of the investment process. The 1970s led to Business Week’s “death of equities” conclusion, and, indeed, investors suffered a few more bad years before markets began an upward climb in 1982. The 2000s had terrible twin bear markets and were known to investors as “The Lost Decade” (note the 1999 and 2009 DJIA numbers above). Having worked with retirees who were living off their portfolios through the market shocks of the 2000s, I will bang the table and profusely proclaim the importance of preparing mentally and emotionally for long bear markets—and to prepare your portfolio! Diversify and have a plan to meet income needs during downturns!
It doesn’t have to be quite this bad. The Dow Jones Industrial Average is comprised of 30 U.S. industrial stocks. Building more broadly diversified portfolios containing multiple asset classes, each chosen for attractive risk versus return characteristics (and ideally adding it’s own unique pattern of returns to the portfolio), can help bring more consistent overall returns. Investors in the 70s and 2000s who owned international stocks, bonds, and real estate benefited from the broader mix of investments.
There will be trying times in the markets ahead. I am confident there will also be periods of great reward. It is crucial to evaluate your portfolio, financial plan, and appetite for risk now. Run the lifeboat drill before sailing into the storm. Do you hold an “all-weather” portfolio or simply a “fair weather” portfolio? Taking preemptive planning actions will help you have confidence when rough markets hit and allow you to stay in position to harness the benefits that investing can bring over the long haul!
If you have any questions, feel free to call or email me.