Thursday, September 10, 2015

My Worst Case Stock Market Scenario

A long time ago on a message board far, far away somebody posted their worst case scenario. As is typical, it involved a big plunge. I shared my scenario and he admitted that mine was worse. I will share it yet again here today.

The Stock Market Trades Sideways

That's it. It doesn't sound so bad, right? I beg to differ.

Imagine that it trades sideways for a very long time.

Imagine all the money lost on call options.

Imagine all the money lost on put options.

Imagine all the money sitting in cash waiting for an opportunity that never comes.

Imagine the shortfall in expected pension returns.

Imagine all the money not made by hedge funds.

Imagine no way to make money either up or down except for dividends. Bulls make no money. Bears make no money. Pigs make no money.

Imagine dividends dwindling due to the sour investment climate trickling over to consumer spending.

Imagine inflation eating away nest eggs like a slow death by a thousand cuts.

Imagine inflation eventually picking up, which would make a sideways trading stock market unbearably painful.

I'm not saying this will happen. I'm simply arguing that it is my worst case scenario. It is one reason that I have embraced long-term inflation protected treasuries over the long-term. I'm not much of a risk taker in retirement.

That said, anyone who thinks they are *absolutely* safe buying short-term protection for their long-term stock market portfolios simply isn't being imaginative enough when it comes to worst case scenarios. There are no absolutes. There is no safe store of value.

I could think up even worse, of course. I can't protect myself against large asteroids striking the planet or terrorists with suitcase weapons of mass destruction. There's no point dwelling on the unprotectable. If the you know what truly hits the fan someday, let it be long after I'm dead and cremated. Call me an optimist, lol. Sigh.

This is not investment advice.


Stagflationary Mark said...

This would probably be a bad time to point out that the stock market has produced a year's worth of nothing burger, on average.

I'm not claiming that my worst case scenario began a year ago though.

It's funny. My worst case bond market scenario is similar. It involves short-term interest rates moving sideways for a very long time. It's called ZIRP.

Let's hope sideways isn't the new black, lol. Sigh.

Mr Slippery said...

The solution is simple. Just be rich like Jamie Dimon. Come on, people, this isn't rocket surgery.

Stagflationary Mark said...

Mr Slippery,

Yes! The executives get paid even if profits are zero. Bonuses too more than likely! Genius!

Rocket surgery? No. Cutting workers and axing jobs requires organizational tree surgery! Yes!!

Lumberjack Song