Transforming personal finance since 2011

#80 — Are we facing a "lost decade" for equity markets?


May 8th, 2022

By Andrew Craig

Reading time: ~ 8 minutes

How to stop worrying about what markets may or may not do...

Earlier this week, one of the members of our Community shared a piece with the rest of the group quoting an investment bank's chief equity strategist suggesting that "The stock market faces a lost decade of zero returns...".

Given all that has happened so far in 2022, understandably these sorts of concerns have cropped up more or less regularly over the last several weeks.

Many of our members have asked my thoughts on what to do "at the moment " given these market conditions. As such, I thought it might be worth sharing the answer I wrote for our Community with our broader email list. These sorts of concerns come up time and time again and, as I have written in the past, I genuinely believe that there is a broad approach to investment, overall, which gives you a good chance of not having to worry about such things - which, the evidence suggested, may be very good for your long run investment returns and ability to build wealth and, arguably even more importantly, for your state of mind.

As I wrote:


"My broad comment on this is that there are always analysts / economists / strategists and other market commentators writing articles using lots of clever (and often entirely sensible) charts and graphs – either to tell their readers to buy – or to sell. When you see pieces like this – you have to stop for a moment and think about the motivation of the author.

If they’re working for an investment bank (the US investment bank Stifel in this case), their motivation is to get clients (big investors) to TRADE – because that is what generates commissions for their business. It is also the case that making a very loud and public case that there is likely to be a crash and then “being right” can often be career-making so a lot of people are playing that game at the moment given there probably will be a crash based on all the valuation metrics and the evidence of history etc - just the points made in the article.

…but there is lots to say about this. First – our whole approach seeks to remove these sorts of thought processes entirely. We want to do this because the evidence is that the more you think about whether there is a “lost decade” coming or whether “now” is the time to buy (or sell) the more likely you are to LOWER your long-run investment returns.

No-one knows whether there will be a crash or when there will be one. The best that market commentators can do is look at history (because it “rhymes” as Mark Twain would say) and try to work out what might happen in future – but this is an incredibly imperfect and unreliable thing to do, and most people get it wrong.

Ergodicity...

The main reason for this is that financial markets are not “ergodic”. Poker is ergodic. Roulette is ergodic. That is to say that there is a fixed set of outcomes and probabilities inherent in the system – so many cards or numbers for example. Financial markets are NOT ergodic – in that there are too many variables and unknowns and the system is not "closed".

I have written before that I believe that the main reason for the strength of the S&P in recent years, for example, has been to do with how the rules changed for US Fortune 500 pension funds and the rise and rise of passive investing (thanks in the main to the lobbying efforts of Vanguard and BlackRock). This point was made rather brilliantly in the Michael Green podcast "Evolving Market Structures" which I have posted on several occasions in the past.

These things never happened in the past (i.e., massive, forced fund flows from nearly all pension investors in the US into a market cap weighted ETF, driving the FAANG stocks and the S&P ever higher).

History is circular (and rhymes) to a certain extent, but it is also linear, and this is actually more important and powerful IMO – in that we are making progress all the time and doing things as a species that we never did before / last time there was a “crash”.

If you compare what financial markets did in 1929, or 1987 to today, you might be able to improve your chances of calling markets a bit, but the world is factually completely different now to how it was then, so things will probably unfold differently - particularly when you consider interest rates and monetary policy given how important those things are.

There was also no internet and there were no smart phones "last time" for example, aside from numerous other similar factors which make today very difficult to compare to yesterday in any particularly meaningful way. How do all these factors which are unique to 2022 change things? There are just far, far too many variables in far, far too much of a complex system.

For me – that means that the best thing to do is to invest every month, without fail for the very long run and make no attempt to time the market at any point in your investing career. In doing so – you need to “own the world” to capture all that human progress and you need to “own inflation” because it is factually true that governments all over the world are running fiat monetary systems which increase the money supply each year – and now more than ever.

Volatility and how old you are...

You also need to deal with volatility – and we believe that the best way to do this is by using the idea of “100 minus your age” - to ensure that your risk is calibrated appropriately for your lifecycle - because losing 50% of £10k when you’re 30 is a very different problem to losing 50% of £1m when you’re 60.

THE most important things to do with respect to this are to invest every month in a small number of funds for at least five years (because this is the time period you need to maximise the chance that you will be up, no matter what happens in markets in the meantime - particularly if you're buying in monthly). You then tweak your allocation (based on 100 minus your age) and do that again (for five years), and again and again for as long as you can.

If there is a “lost decade” in equities coming – this probably won’t matter that much if you are doing this, because when the crash comes, you will be buying every month thereafter. If equity markets do fall e.g., 50% from here – you will then be picking them up at half price that month and at lower prices every month from then on as they build back up again. Over the very long run this means you will be highly unlikely to suffer a "lost decade" yourself.

(Over)thinking this stuff is the reason why most investors make around 4% less than market returns (of course people in cash who don't invest at all - the majority of the population sadly - make far less than that – they actually go backwards).

The key thing is to remove any element of market timing from your thought process. Have confidence that you’re going to invest for a very long time. Apply "100 minus your age" to ensure that you have the right mix of “aggressive” vs “defensive” assets for your age and stage and then invest every month.

For those at retirement – we will do our best to share some work in the weeks ahead about optimal withdrawal rates and how you should cater to aggressive vs defensive in the decumulation phase. I would remind you that the professors have produced some software to help with that. It will be a few months before we can share this given all the work that needs to be done, particularly the regulatory side of that but just FYI.

For now - this article should help in terms of how important the whole psychology of removing the market timing thought process is. I wrote this some time ago and there are plenty of other articles to be found here in the Community and also in this section of our website that make the same case in different ways with new evidence. Please do have a trot through that at your convenience. I hope that helps!

Very best wishes, Andy..."


As I say, I hope that you might find this piece vaguely useful. There may well be a big financial market correction in the months ahead. There is plenty being written about how the current situation looks quite a lot like the 1970s - with the horrendous situation in the Ukraine and the very real threat of stagflation - but it is our considered belief that implementing a sensible strategy of buying the right mix of "aggressive" versus "defensive" assets, doing that regularly over a lifetime of investing will more than likely deliver a great outcome, almost no matter what is going on in the meantime.

PS. If you found the above useful or interesting, do please consider joining our online Community where you can discuss such things and lots else besides with a very friendly group of like-minded folk on that long investment journey.