The Nikkei Straw Man

A: Stocks are good long-term investments.

B: Not if you invested in the Nikkei at the end of 1989.

If you say something positive about investing for the long run or the magic of compounding, be prepared. A bear in the woods may suddenly appear, attacking you with their favorite straw man: the Nikkei. Let me explain…

During an epic bubble in Japanese stocks during the 1980s, the Nikkei Index advanced 492%, ending 1989 at an all-time high of 38,915.

Nikkei Index and Price return graph

28+ years later, that all-time high still stands, with the Nikkei trading 42% its 1989 peak.

Image of Nikkei Index from 1979 to 2018

So case closed, then? Stocks are not good long-term investments?

Not exactly. The Nikkei is the classic straw man argument for two main reasons…

1) It assumes you invested 100% in the single country index, with no dividends or reinvestment.

In 1990, the 7 largest companies (and 8 of the top 10) in the world were based in Japan. Today, there are none.

List of largest companies globally by market cap from 1980 to 2018

Markets change, leaders change (both individual stock and country), and the future is unknowable. Which is why diversification is of paramount importance.

If you simply invested 50% in the U.S. (S&P 500) and 50% in Japan (Nikkei 225) at the end of 1989, your annualized return would be +4.8%. This includes the reinvestment of dividends, which few choose to include when using the Nikkei as their straw man.

Image of annualized total return from December 1989 to July 2018

Note: Total return data from Bloomberg, using Monthly Re-balancing. 

2) It assumes you invested 100% in a lump sum at the peak.

Not everyone invests 100% of their money in one of the biggest bubbles in history at its peak. Let’s say someone in Japan was just starting their career in December 1989 (the worst timing imaginable), and started dollar-cost-averaging into the Nikkei, continuing until today. 28 years later, they would have an annualized return of 4.2% (versus -0.8% for the lump sum). Not fantastic, but not nearly as disastrous as the lump sum argument.

Image of annualized total return of Lump Sum and Dollar-cost average from December 1989 till July 2018

How is this possible? The Nikkei hasn’t been a terrible investment for the entirety of the past 28 years.

Looking at the returns from various starting points to today illustrates that investors would only have negative annualized returns if they invested at or near the peak (see chart below). As the Nikkei worked off its extreme overvaluation during the 1990s and early 2000s (by going lower), forward returns improved. They improved even more during the financial crisis of 2008. Dollar-cost-averaging during this time proved to be beneficial as the Nikkei declined over 80% from its peak in 1989 to its ultimate low in 2008. This is the “buy low” part in the “buy low/sell high” saying. And since then, the Nikkei has more than tripled in value.

Nikkei annualized total returns from December 1989 till July 2018

Stocks for the Long Run

The Nikkei is not the only straw man, it’s just the most popular. There are a number of examples throughout history where a single country’s stock market had negative returns over 20 years, 30 years, or even longer. But that’s not an argument against long-term investing in equities. It’s an argument against concentration and home bias.

The Nikkei straw man refutes an argument that was never presented: that stocks will always and everywhere go up. They will not. Which is why it is prudent to diversify your equity holdings globally and hold other asset classes as well. Doing so will be painful at times (see recent post on FOMO), but it will increase your odds of actually staying invested for the “long run.”


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Charlie Bilello is the Director of Research at Pension Partners, LLC, an investment advisor that manages mutual funds and separate accounts. He is the co-author of four award-winning research papers on market anomalies and investing. Charlie is responsible for strategy development, investment research and communicating the firm’s investment themes and portfolio positioning to clients. Prior to joining Pension Partners, he was the Managing Member of Momentum Global Advisors and previously held positions as a Credit, Equity and Hedge Fund Analyst at billion dollar alternative investment firms.

Charlie holds a J.D. and M.B.A. in Finance and Accounting from Fordham University and a B.A. in Economics from Binghamton University. He is a Chartered Market Technician (CMT) and also holds the Certified Public Accountant (CPA) certificate.

In 2017, Charlie was named the StockTwits Person of the Year. He has been named by Business Insider and MarketWatch as one of the top people to follow on Twitter and his work has been featured in Barron’s, Bloomberg, and the Wall Street Journal.

You can follow Charlie on twitter here.


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