Following the recent ascent of the Japanese stock market, one is reminded of the risk that a buy and hold strategy may not always prove successful.
As a teenager growing up in the late 1980s, it seemed all but certain that Japan was taking over the world. Japanese investors notably bought Rockefeller Center as well as the storied Pebble Beach Golf Course for incomprehensible sums of money at the time. Sony Walkmans were ubiquitous and avant garde students were learning Japanese. The Nikkei 225 Index peaked on December 29, 1989, and bursting stock and real estate bubbles followed.
Nikkei 225 Index (NKY) 40-year Quarterly Chart
Thirty-four years later, the Nikkei 225 Index is approaching the 1989 closing market high, helped by the substantial weakening of the Japanese Yen against major currencies. In just under 18 months, the US Dollar has gained more than 36% against the Yen from ¥110 to ¥150. Investors who bought and held stocks in Japan in the late 80s and early 90s have had to wait more than thirty years just to break even excluding the cost of maintaining their purchasing power.
US Dollar / Japanese Yen (USD/JPY) 18-Month Monthly Chart
This phenomenon is not isolated to Japan as the US has also seen droughts of more than a decade in equity markets. Following the crash of 1929, investors had to wait nearly 25 years to see the index regain its previous high level excluding the loss of purchasing power.
S&P 500 Index (SPX) 27-Year Monthly Chart
Adding insult to injury, long term droughts in equities tend to occur concurrently to rising and volatile levels of inflation.
CPI Year Over Year Index (CPI YOY) 27-Year Monthly Chart
Most recently, the S&P 500 exhibited multiple uptrends and downtrends, but made little overall progress from 1968 to 1982.
S&P 500 Index (SPX) 15-year Monthly Chart
This period was also characterized by multiple waves of high and persistent inflation.
CPI Year Over Year Index (CPI YOY) 15-Year Monthly chart
Historically, multi-decade periods of falling inflation and interest rates tend to be followed by periods of rising inflation and interest rates. Having most recently experienced 40 years of falling interest rates and mild inflation, it’s easy as an investor to be lulled into complacency that this environment will once again reassert itself. And who is to say with any certainty as none of us know the future. However, out of prudence we must remain open to the idea that a paradigm shift is underway and the strategy of buy and hold investing, as successful as it has been over the preceding decades, may not serve investors in the years to come. Of particular concern are the millions of baby boomers who have shifted from accumulating assets to drawing down on their portfolios in retirement. Will a buy and hold strategy deliver the growth necessary to sustain their retirements? I wouldn’t bet on it but let’s hope.