Lessons from Japan’s 1989 Market Crash
If you’ve read my previous posts, you know I’m extremely optimistic about the stock market (to a fault).
I think we’re at the precipice of a technological revolution that will make the invention of the PC and internet pale in comparison (Artificial Intelligence/Automation/Nano Technology). And with these tectonic shifts coming up in the horizon, the innovations in the pipeline will take the stock market to extraordinary heights.
But as with anything, it’s prudent to look at both sides of the coin, because anything is possible. Black swan events can and do happen all the time. Today, I’d like to go over one particular black swan event that happened in 1989.
Japan’s Stock Market and Real Estate Crash of 1989
Japan’s stock market, the Nikkei, crashed in 1989. It went from a high of 38,915 to closing at 7,054.98 in 2009, 81.9% below its peak 20 years later. And fast forward to 2017; it’s still approximately 50% down from its peak close to 30 years ago!
And it wasn’t just stocks. Real estate got demolished as well. At its peak, Tokyo’s prime neighborhoods rose to levels that were 350x more expensive than comparable land in Manhattan, New York (Investopedia, 2010). And the land underneath the Tokyo Imperial Palace was rumored to have been worth as much as the entire state of California in the same year (Impoco, 2008)!
So what does this have anything to do with me?
If you’re invested in anything. Just know that there is risk involved. You can’t make money without risk. But things are called “risky” for a reason. There’s potential for a downside. And when it comes to riskier assets like equities (stocks) and real estate, the downside can be big enough to totally evaporate everything you’ve worked for and may be prolonged enough to not recover within your lifetime.
So what am I supposed to do to avert this type of scenario?
You can’t avert disaster 100%. In other words, you can’t eliminate risk entirely if you want to earn a return on your money. It comes with the territory. There’s just no such thing as a risk-less investment. That said, you can do things to protect yourself against the worst case scenarios and diminish risk.
- Don’t invest everything in one country (i.e. US Stock Market); have global diversification
- Don’t just invest in stocks; invest in bonds, TIPS, REITS, real estate, and even commodities *gasp
- Invest in the entire bucket, not just sectors (total stock market approach)
Didn’t you just write a post about not investing in commodities?
Yes I did. But here’s the thing. Even the things I most adamantly believe in (in this case, not investing in commodities like oil, corn, or precious metals) comes with a caveat and shouldn’t be taken as a one-size-fits all answer. Everyone’s financial situation is different. I wouldn’t tell someone who has $10,000 in retirement savings to go buy gold. But someone who has $10 million? Buy some gold. The reason is because, an extra 5% in stocks for someone who has a ton of money already, and who has by any definition “won the game”, for someone like that, there’s less marginal utility for every additional dollar that goes into a certain investment.
The same goes for someone getting closer to retirement. The closer you get to retirement, your appetite for risk-taking should and must diminish. And as you get closer and closer to that point in your life, you should de-escalate your portfolio from stocks, and into bonds, TIPS (to protect against inflation), and other cash-like instruments. Personally for me, a 60/40 stocks and bonds split sounds healthy even in retirement.
So having said all of this, what are you personally doing with your portfolio?
Right now I’m still in the accumulation phase, so I’m 100% stocks. And I’m ok with the uncertainty and risk involved with being 100% in stocks because if I were to lose everything, I still have enough time and human capital (working years), left in me to ride out 99.99% of scenarios. It’s also why I insure myself up the ying yang (i.e. maxed out car insurance, laddered fixed term life, disability, umbrella insurance, malpractice for the wife, etc). And even with my 100% allocation in stocks, I’m highly diversified from a global allocation standpoint. So not all of my money is here in the US. I’d say it’s about 50/50 at this point.
What do you guys think about what happened with Japan? Do you know of anyone (i.e. family members or friends) who was personally affected by this crash? Has this post given you pause and made you think about your current portfolio? What are some of the things you’re going to do to protect yourself and your family from potential tragedy like this?