By John Maudlin
My back-of-the-napkin math says retirement accounts are at least 50% invested in equity index funds.
Some of you are now asking, “What’s the problem? All those index funds have come back. Everybody is back to where they started.”
Not so fast, Jack.
Bear Markets Destroy Retirement Funds
Bear markets that are not followed by a recession have V shaped recoveries. The December bump, which barely qualifies for a bear market, is exactly what we got.
Bear markets that are followed by a recession take a very long time to recover. They also tend to be in the 40 to 50% loss range.
Remember: a 50% loss requires a 100% gain to breakeven. That took about five years from the bottom of the last bear market.
Plus, investors seldom capture all the upside in equities. The S&P is up well over 3.5x (give or take) in the last 10 years. But the 401(k)s and IRAs did not even double.
Some of that is due to investors getting out at the bottom and back in later. Some is maybe due to high bond allocations in 2009.
(Bond funds had done very well back then, and we know people chase returns).
The Next Bear Market Will Be Even More Painful
When that next recession and bear market hit, it will take even longer to bounce back. The recovery will be even slower than this last one.
My research shows that large amounts of debt slows recoveries. Very large amounts create flat economies. And we are approaching very large amounts in the US.
The next recession will shortly blow up the US debt to $30 trillion. It won’t take long to hit $40 trillion.
Will that much debt turn us Japanese? That’s not entirely clear. The US has the world’s reserve currency and a unique role in global commerce and finance.
But at a minimum, the recovery will be slower. A double-dip recession is also possible, making stock market index fund losses even worse.
You must have some kind of strategy for dealing with market volatility.
A Double Problem for Baby Boomers
Second, those who did save enough could see it evaporate when we get into another bear market, which we certainly will at some point.
So, here are a few pieces of advice from me.
First, save… That’s self-explanatory. Don’t rely on Social Security, which won’t give you enough to retire comfortably.
Second, invest in programs that give you at least a chance to dodge bear markets. Buy and hold works in theory, but not for most people because we are humans with emotions.
We should recognize that and take steps to control it. As I continually say, we should invest in trading strategies and not buy-and-hold index funds in this environment.
And of course, fixed income strategies like actual bonds, real estate, private credit, and so on.