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.


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


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 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.


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.


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.


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.


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.”

Disclaimer: At Pension Partners, we use Bonds as our defensive position in our absolute return strategies for all of the above reasons. Bonds have provided a more consistent defensive alternative to ...

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