When I express confidence about the stock markets ability to produce returns over the long term, I inevitably receive a response along the lines of “what about Japan?”
What they are meaning by this is that Japan’s stock market has not yet reached its peak value from 1989! Over 30 years and the market has not moved forward.
On the surface it seems a sound argument for not investing in stocks and believing that the markets may not move forward and long term investing doesn’t always work. You can’t argue the numbers.
But you can argue the logic.
1/. Japan is not the world
If you are investing all your stock allocation into just one country, and that country is Japan, then you are carrying a whole lot of risk with no guarantee of positive returns.
A more common sense approach to investing is investing in a wide range of countries.
The example of “what about Japan?” ignores the fact that the most reasonable investors are globally diversified.
This is not a problem of stocks not being good enough. It is a problem of your stock portfolio choices not being good enough. They are not the same thing.
2/. Asset Accumulation isn’t one and done
Very few people invest their money in stocks once and never again. Most people investing savings do so on a regular basis, such as monthly. In the Japan example, this means that all your shares were unlikely to have been bought at the top, but a lot also been purchased at lower prices too. So even though the highs have not been reached in over 30 years, some investors, depending when they started, will still be making money.
3/. Japan is the outlier (currently)
Most other regions have done very well over the last 30 years. Japan not so. But chances are there will be another region or asset class that performs significantly lower than your expectations over the next 30 years. That is the nature of risk. The nature of investing.
The problem is not Japan. The problem is investing done wrong
The problem here is not investing in stocks. It is investing done wrong. One period in time and in one location.
The argument doesn’t pass muster for me and I will always remain extremely confident in the ability for businesses, and therefore stocks, to continue to add value over the long term. Which stocks and which countries I am not so sure on and that is why I hold them all.
As long as you are widely diversified across asset classes and countries, invest often, and avoid any extreme stances, then you give yourself a great chance of avoiding a Japan like situation. Saving more money is also always a great hedge.
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The information contained on this site is the opinion of the individual author(s) based on their personal opinions, observation, research, and years of experience. The information offered by this website is general education only and is not meant to be taken as individualised financial advice, legal advice, tax advice, or any other kind of advice. You can read more of my disclaimer here