Do You Understand the Ramifications of Passive Investing?

What is Passive Investing?

Passive investing broadly refers to a buy-and-hold portfolio strategy for long-term investment horizons, with minimal trading in the market. Index investing is perhaps the most common form of passive investing, whereby investors seek to replicate and hold a broad market index or indices.

The above explanation is from Investopedia.

Is Passive Investing Creating a Bubble?

The Long Version

My Two Cents

For starters, thanks to @TheBondFreak @GratkeWealth @DiMartinoBooth and @profplum99 and anyone else in the chain I missed.

With that out of the way, please take a look at what happened to a buy and hold strategy in the Nikkei. 

Buy and Hold Nikkei Synopsis

  • The Nikkei fell 82% in 19 years. 
  • Every rally in that time was a sucker rally.
  • Despite a 158% rally, a 140% rally, two 64% rallies, and a 63% rally the Nikkei is still 31% below where it was 30 years ago!

Initial Valuation Starting Point

The Nikkei was dirt cheap in 2009 and amazingly expensive at the peak in 1990.

Congratulations to those who got in the Nikkei in 2009. They are up 280%.

That shows the importance of using valuation as an investment starting point. 

Can Something Like That Happen in the US?

Sure, why not?

That is not a prediction, just an observation.

Shiller Smoothed PE

Chicken Littles

It is easy to dismiss as Chicken Littles those who continually point out valuations, Shiller PE ratios and the like, (myself included because I honestly never thought the bubble would re-expand as it has).

I do not claim the DOW is the Nikkei or that it will follow that path. But it could. 

Moreover, pensions plans will be crucified if the stock market does nothing but go sideways for 10 years.

Regardless, history shows that valuations do matter. Japan provides the best example.

Will be different this time? Forever?

Mish