I have written in the past that I plan to be invested in stocks forever. I’m a believer in publicly traded stocks. But that means I am making a bet on the future.
Here’s why I’m comfortable with that bet: Stocks have historically been one of the highest-returning assets across time, and I am convinced that will continue as long as I’m alive.
Does it have to continue? No, it doesn’t.
There are ever-present downsides to holding stocks, namely that they periodically plummet in price. But also note that the market has always recovered. Always. Every time.
But does that have to continue as well? No, I suppose, it doesn’t.
Think about it, though. What would it take for the stock market to lose value permanently? That is the worst-case scenario. What would it mean?
It would mean the largest U.S. companies stop making money or no longer exist.
How could that happen? Well, here are a few scenarios.
Perhaps the government confiscates all company earnings. But if that’s the case, why wouldn’t the government also confiscate crops or cattle or collectibles or cryptocurrency?
Or how about this: Perhaps there’s no power because a nuclear bomb has been dropped and the economy grinds to a halt. But if that’s the case, where’s the energy coming from to move crops or cattle or collectibles or cryptocurrency?
Perhaps there are no more consumers because of an unstoppable disease. But if that’s the case, who will purchase your crops or cattle or collectibles or cryptocurrency?
Investors frequently shower themselves with angst about what a catastrophic drop in the stock market could mean. When, in reality, it would mean every asset of every kind would be similarly impaired. No one would win in that scenario. And to the extent anyone did somehow win, life would be so fundamentally different than today, most of us would have a terrible time dealing with it.
If you think farmland or real estate will save you in such an environment, it won’t. History is a helpful guide. Just look at an extreme event, such as the Great Depression.
Iowa Public Television chronicled the devastation of the Great Depression on Iowa farmers. Farming families were certainly not spared from the economic wreckage of that time. The PBS documentary offered the following sobering passage: “In some cases, the price of a bushel of corn fell to just eight or ten cents. Some farm families began burning corn rather than coal in their stoves because corn was cheaper…the countryside smelled like popcorn from all the corn burning in the kitchen stoves.”
According to the National Agricultural Statistics Service, U.S. agricultural land values averaged $69 per acre in 1920. By the early 1930s, prices settled in a range of $30 to $33 per acre, a drop of more than 50%.
If the stock market goes away, forget about your farmland saving you.
Other real estate fared no better in the Great Depression. A study by two Harvard professors revealed that real estate in New York City fell by 67% during the Great Depression.
If the worst case hits us, no asset will be immune – stocks, farmland, commercial real estate, you name it.
Don’t write off the stocks simply because their values are readily displayed every second the market is open. Just because farmland and other real estate don’t have their values splashed out for the world to see, second by second, doesn’t mean they are more secure or safe. Unfortunately, they are just as likely to experience financial stress in a worst-case scenario.
So either the world devolves into a banana republic or it continues to innovate and progress. I’m betting on the latter. If that doesn’t come to be, I’ll have bigger concerns than my portfolio.
You will, too – no matter what assets you hold.
Comentarios