The True Enemy of Index Investing Is Not a ‘Market Crash’—A Market Where Your Assets Shrink No Matter How Much You Invest

I believe index investing is an excellent means of building wealth.It is low-cost and allows for diversification across a wide range of companies.You do not need to analyze companies one by one like with individual stocks, and you can benefit from long-term economic growth.I myself have no intention of denying index investing.However, I have one question.“With index investing, you don’t have to think about the market at all.”Is this really true?Something scarier than a crashWhen people think of the risks of stock investing, many think of a “market crash.”Certainly, it is scary to see your assets drop by 20% or 30% in a few days.However, I believe there is a more troublesome situation in long-term investing.That is,a market where you are not rewarded no matter how many years you invest.You invest 100,000 yen every month.Yet your assets do not grow.You put in another 100,000 yen.But the market drops, and even the amount you just invested disappears.You invest again the following month.And yet, your assets are still lower than they were the previous year.Such a state continues not for half a year, but for one, two, or three years.Rather than a sudden, sharp market crash,it is like being slowly strangled, where your assets decrease no matter how much you invest.I believe that this is the kind of market environment that truly exhausts people in long-term investing.A ‘Lost Decade’ actually existedThis is not a hypothetical story.There was indeed a time when US stocks did not reward investors for a long period.S&P Global refers to the period from January 2000 to December 2009 as a ‘Lost Decade’ for US stock investors, noting that the cumulative total return of the S&P 500 including dividends for these 10 years was negative 9.1%.The IT bubble burst in 2000.After several years of decline, just when it seemed stock prices had finally recovered, the 2008 Lehman Shock occurred.Looking at the chart in hindsight,’I should have just held onto it’is easy to say.However, actually living through those 10 years is a different matter.Your assets just won’t grow.Even though you are putting in new money every month, your total assets are not increasing as expected.Just when you think they have finally recovered, they drop significantly again.You end up spending years in such a state.Enduring a market crash is momentary.However,Isn’t enduring a period where your deposits go unrewarded a completely different skill?Do Japanese investors flee immediately when a crash occurs?There is one fact I would like to separate here.’Beginners panic-sell as soon as the market crashes’is not an accurate assumption to make.In August 2024, Japanese stocks experienced a historic plunge.Subsequently, in a survey conducted by the Rakuten Securities Economic Research Institute targeting over 3,400 individual investors, 49.1% of respondents said they ‘did nothing’ during the crash, while 34.2% said they ‘bought stocks’.Only 5.2% said they ‘sold stocks’.Furthermore, 61.1% responded that the crash had ‘no impact’ on their investment activities.At least as far as this survey shows,Japanese individual investors were calmer than imagined in the face of a short-term crashis what we can say.Therefore, I do not mean to argue that ‘index investors cannot withstand a crash’.What I want to address is what comes after that.Are a short-term crash and several years of stagnation the same thing?The investment environment widely used in Japan today does not actually have a very long history.The Tsumitate NISA started in 2018.The new NISA began in 2024.Currently, the ‘eMAXIS Slim US Equity (S&P 500)’, one of the representative low-cost investment trusts, was also established in July 2018.In other words, for many people who have started index investing in Japan today,How much people can actually continue to make contributions during a period of several years where stock prices offer no rewards—I believe that behavioral data on this is not yet sufficiently accumulated.At the very least,’Japanese index investors can withstand long-term stagnation without any issues’or’they cannot withstand it’cannot be easily concluded at this point in time.I would like to draw a line here between fact and hypothesis.What is truly painful is not just that your assets are decreasing.And there is another troublesome aspect to long-term stagnation.It is the information from those around you.When the market is rising,’You should just buy the S&P 500”Long-term accumulation is the best strategy’information like this becomes more visible.However, if the market stagnates for several years, the scenery you see will likely change as well.’The era of US stocks is over”From now on, it’s other countries”Bonds are better than stocks”You should hold cash right now’SNS, YouTube, and investment articles.And sometimes, even from colleagues at work or friends,”Are you still doing stocks?”you might be asked.This is not just about mental fortitude.The “peer effect,” where investment decisions are influenced by those around you, has been confirmed in empirical studies.There are also studies showing that the investment behavior of colleagues at work influences an individual’s participation in investing and their buying and selling decisions.In other words, we are not investing in complete isolation.With assets not increasing for years,information that makes you doubt your own judgment keeps coming in from those around you.In that situation, can you still,”just keep investing without thinking about anything,”continue investing relying only on that one phrase?Market perspective is not the “ability to predict the future”Here, I would like to explain what I consider to be a “market perspective.”When people say market perspective,”Stock prices will rise next month””This is the bottom””The next crash will come in [month]”you might imagine predictive abilities like these.However, the market perspective I want to convey is a bit different.It is not the ability to predict the future, but the ability to understand what is happening right now.Why are stock prices falling?Is it a recession?Is it rising interest rates?Are corporate profits declining?Is it merely a correction of overvaluation?And,has the premise upon which I invested in that asset truly collapsed?Think about that.As a result,”The situation is bad. However, the premise for long-term investment has not changed.”If you think that, you should do nothing.Conversely, if you judge that the very premise upon which you invested was wrong, you may reconsider.In other words,”watching the market” and “frequently buying and selling” are not the same thing.A market perspective is a compass for the voyageI think of long-term investment as something similar to a voyage.With index investing, the destination is determined to some extent.To increase assets while benefiting from long-term corporate profits and economic growth.However, there are storms during the voyage.And what is even more troublesome is the time when you cannot see land no matter how many years you sail.There is no wind blowing.There is no sense of progress either.From those around you,”That direction is wrong”even voices like that can be heard.At such times,without even a compass,”Because I was told to just keep going in this direction”can you really keep going for years for that reason alone?Of course, even if you have a compass, you don’t know what the weather will be like tomorrow.You don’t know when the storm will end either.However,at the very least, you can confirm which direction you are heading.To me, a market outlook is something close to that.A market outlook is not a weather forecast. It is a compass.”Doing nothing” and “thinking nothing” are differentIn index investing, as a final action,”Do not sell”“Continue your regular contributions.”You will often arrive at this conclusion.However,“I heard index investing is fine if you just leave it alone, so I’m holding onto it”and“I’ve thought about what is happening now and decided that the premise of my investment hasn’t collapsed, so I will continue to hold”are, while identical from the outside, completely different in my view.Doing nothing and thinking about nothing are two different things.What follows is a hypothesis born from my own experience.The more one has a sense of the market, the more likely they are to continue long-term investing.That causal relationship has not been proven for current index investors in Japan.In fact, having knowledge might even lead some to make unnecessary trades.Therefore,“If you have a sense of the market, you can definitely continue long-term investing”is not something I can go so far as to say.Even so, I believe thattrying to understand the market is meaningful, not to beat the market average, but to avoid being forced out of the market.I think that is the case.Index investing does not require the ability to predict the future.However,When you have traveled for years without seeing your destination,when your assets do not grow no matter how much you invest,and when you are on a voyage where those around you keep telling you that your investment strategy is wrong,is it really unnecessary to have a way to check the direction you are heading?I do not think so.