Emma’s Note: Could you afford to lose 50% of your portfolio in a crash? Or would that be a loss from which you would find it extremely difficult to recover, one that would cause a significant drop in your quality of life in retirement?
Read on below to hear from Bill on the assets he thinks present the biggest risk of a Big Loss in the months and years ahead… and some sage advice for how to avoid it.
The idea of a “Big Loss” was something the old-timer, financial writer Richard Russell, used to talk about.
Investing is mostly a search for capital gains… and dividends, of course.
These gains are compounded over time. So, naturally, compounding at 10% makes a big difference, as opposed to compounding at 5%.
But whether you get 3% or 8% in any given year doesn’t really make much of a difference. It’s the long-term average rate of growth that matters.
And as long as the number is positive, you’re moving forward, toward your goal.
Four Risks for a Big Loss
When you are young, you can even afford a loss from time to time. In fact, you should expect it.
The general rule is that you should take more chances when you are young – on your career as well as your investments. That is when you have the most to gain and the least to lose.
But as you get older, the calculation shifts in the other direction. Take a big loss and you may never recover.
So, where’s the big loss likely to come from in the months and years ahead?
Today’s most obvious risks are…
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Cryptocurrencies, which could go to zero anytime
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Tech stocks, which our Bonner-Denning Letter coauthor Dan Denning expects to be cut in half, at least
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Stocks, generally, which are overvalued
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And bonds, which will be largely wiped out in an inflationary episode.
Greed and Futurism
Each of these risks has a different configuration.
The risk of cryptos is unknown. We have no idea when or how much they might go down.
But since they represent a possible Big Loss… a mature investor should be careful with them. ‘Nuff said.
As for the tech stocks, the odds are clearer. We know what happens to bubbly tech stocks. We’ve seen this movie before… in the big tech boom of the 1960s…and again in the dot-com bubble of 1999.
From the top in the go-go tech market in 1968, the typical computer stock fell 80% by May 1970. Then, after the market began its decline in 2000, Cisco went down 86% by October. And the tech-heavy Nasdaq dropped nearly 80% over the next two-and-a-half years.
Techs get extremely overpriced because they represent the cutting edge of optimism… of hopism… of greed and futurism. Then, when the bubble pops, so does faith in its tech stars.
Most likely, today’s leading tech stocks – if they survive – will be available at half the price, or less, in the years ahead.
1970s Redux
It is hard to speak generally about the rest of the stock market.
The indexes are now so dominated by the tech giants, many other stocks are less obviously overpriced. In a sell-off, most of them will go down… but many represent solid, long-term investments.
Still, a 20% or 30% decline – or even a 50% decline, as Dan predicts – would be a Big Loss. And even if a stock were reasonably priced, it could stay in the “loss” column for a long time.
There’s no guarantee that the stock market will bounce back, as it did in 2009 and 2020.
Our guess… and it is only a guess… is that the next stock market crisis will be followed by another big “stimulus” push… which will probably lead to another flourish in the stock market.
But later, stock prices are unlikely to keep up with consumer price inflation. If history is any guide, stocks could lose 75% of their real value, as they did in the 1970s.
Best Bet for a Mature Investor
The final Big Loss threat is the bond market.
Bonds are supposed to be a safe-haven. Bond investors have first dibs, over stock investors, on a company’s assets. So they are inherently safer in a bankruptcy or a stock market collapse.
And since the first stage of the next crisis is likely to be a sell-off in stocks, bonds are likely to look like a pretty good alternative.
The trouble with bonds is that when the feds try to save the stock market, they will do so by flooding the economy with more fake money – just like they did when stocks crashed in 2020.
And we know where that leads: a substantial decline in the value of the U.S. dollar and rising inflation.
Since bond yields come as fixed-dollar returns, they are very sensitive to increases in inflation.
In the 1970s, bonds were called “certificates of confiscation.” We doubt the next bout of inflation will treat bonds any better.
Most likely, it will be much worse. Our guess is that it could result in a 75%-90% loss for bondholders.
That’s a pretty big loss. And like the loss in tech stocks, it is a high-probability event.
So what’s the best bet for the mature investor?
Avoid cryptos, techs, and bonds… and be choosy about what stocks you own.
Regards,
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Bill
Emma’s Note: Don’t think a 50% loss on your stock portfolio is possible? As Bill’s Bonner-Denning Letter coauthor, Dan Denning, pointed out in their recent monthly issue, a stock market that doubled in 354 trading days could very easily lose 50% in less than 50 days. As Dan says, “When a collapse in belief or morale comes, it comes quickly. Military occupations, bull markets, even currency regimes… it’s the same process.”
And throughout history, in times of crisis – be that financial, economic, currency, or political – one asset has proven to be the single-best way for savers and individuals to preserve their wealth. Read on here for more…
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