Allan Roth: Now’s the Time to Feel Market Pain

It’s been a spectacular last couple of years to invest in U.S. stocks. The total return of the Vanguard Total Stock Market ETF (VTI) last year was 23.8% on top of a 26.1% return the year before. That amounts to a 56.1% return over the past couple of years.

We are a few weeks into the new year, yet I have no insights as to how the stock market will perform in 2025. Because U.S. stock returns have been so amazing combined with bonds performing poorly, I’m seeing many investors reluctant to rebalance from stocks to bonds. The pain of prior bear markets is a distant and faded memory. How will markets perform?

As an exercise in investing “what ifs,” here’s an imaginary scenario for 2025. Think of it as wargames for investing. All future data is made up. 

2025 Imaginary Market Recap 

It’s been a horrific year for investors with U.S. stocks down 40.2%, as measured by the Vanguard Total Stock Market ETF (VTI). Though stocks gained 56.1% over the previous two years, this year’s loss resulted in a three-year total return of negative 6.72%. International stocks had slightly lower losses but still lost 27.5% as measured by the Vanguard Total International Stock ETF (VXUS). Bonds provided some ballast gaining 4.5% as measured by the iShares Core U.S. Aggregate Bond ETF (AGG). 

This is the third bear market since the year 2000 in which stocks have fallen by 40% or more. But this time, no quick rebound is predicted by Wall Street analysts.

“We were clearly in a bubble as stock valuations were obviously a fantasy,” said Bernard Madeup, a senior strategist with Intergalactic Securities. “You’d have to be clueless not to know stocks would pin 2025,” he said. 

Fund flows out of equity ETFs into bond ETFs hit record levels as did the surge in money market assets. There was also a surge in the number of lawsuits by investors against their financial advisory firms.

“I had won the game” said Linda Plaintiff. “I could retire and have enough to fund my grandchildren’s college. Who knows if I’ll ever be able to leave my stressful job now and what will I say to my children and grandchildren?”

Another investor, Stan Smith, saw his family’s portfolio decline by more than 60%. “My broker put me in a handful of stocks that had been hot, just in time to see the bubble burst. My advisor knew those stocks were especially overvalued,” Smith wrote in a complaint. He moved to 100% cash to preserve what was left of his once-secure nest egg. Smith had to sell his home and downsize to free up some cash to live on. 

Analyst consensus is pessimistic as to how fast this bear will recover versus prior bears this century. “Those were Teddy bears that quickly recovered but today, we have a Grizzly bear reminiscent of the great depression,” said one respected analyst who asked to remain anonymous. He pointed out that $42.5 trillion of wealth has disappeared. 

Lessons from this imaginary recap 

I don’t know when the next bear market will come. I don’t know how much stocks will fall or how long the bear will last. But I do know we will have another bear market—it’s just part of investing.

With the above, I’ve tried to have you imagine the pain you will be feeling when it does happen. Not just in terms of a percentage decline, but rather in terms of consequences. What consequences would such a bear market have on your life? Would you have to stay at that dreaded job another decade? Would you have to tell your daughter or granddaughter you couldn’t send her to that prestigious college to which she worked so hard to get admitted? Were you already financially independent and won the game yet kept on playing?

Feel the pain—embrace it! Trust me, imagining the pain doesn’t come close to how it will actually feel the next time stocks plunge. Ask yourself what the consequences for you and your family might be if your stocks lost half their value and took a couple of decades to get back to even. 

Rebalance now while stocks are near all-time highs. High-quality bonds and bond funds currently provide yields well over inflation. And don’t give up on international stocks. Though U.S. stocks are hot and driven by a handful of tech stocks now comprising 29% of the $62 trillion value of the U.S. stock market, nothing stays hot forever.

Remember the words of Warren Buffett, who said to “be fearful when others are greedy and be greedy only when others are fearful.” 

Author’s note: This imaginary market plunge was not meant to be political in any way as bear markets happen under both Democratic and Republican administrations. I have a long history of writing about staying the course on investing irrespective of whether your candidate won or lost an election.