How should one structure a portfolio given the possibility that a Total Stock Market Index might decline and not recover for a long time?
"Here are a few things that you could try. But note that they are all capable of failing. They will just reduce the chance of you personally having a lost decade. First a quibble: John Bogle advocates a total stock market index (something like Vanguard's VTSMX) instead of an S&P fund, as the latter represents ""only"" 85% or so of the US market's total capitalization. Smaller companies behave slightly differently than members of the S&P, so this might provide a small help. Bogle also advocates holding some bonds in addition to equities. I'll expand on that below. Account for dividends. Just because the value of the index is the same as its value 10 or 20 years ago doesn't necessarily mean that decade was lost. The companies in the S&P are currently paying out an annualized dividend of about 2%. Even if the actual value of the index doesn't change, you're still getting that 2% per year.  Include bonds.  As I mentioned above, Bogle recommends holding some bonds. I have seen two common rules. One is to never have less than 20% of your total holdings in bonds, and never have more than 80% of your total holdings in bonds. The other popular rule is to hold your age in bonds. For example, I'm about 30, so I should keep about 30% of my holdings in bonds. Regardless of the split, rebalance periodically to keep yourself at that split. What effect would holding bonds have on a lost decade? To make the math easy, let's say you split your holdings evenly between an S&P fund and 10 year Treasuries. Coincidentally, 10 year T-notes have the same 2% yield as the S&P dividends. If you're getting that on half your holdings, and nothing on the other half, you're netting 1% per year. Not great, but not totally lost. To illustrate the effect of rebalancing, use my example of a 70/30 stock/bond split. The S&P lost about 50% of its value from its peak to the bottom of the market in early 2008. If you only held stock, you would need the market to increase in value by 100% in order for you to recover that value. If 30% of your holdings are in bonds, and you rebalance at exactly the bottom of the stock market, you only need the stock index to increase in value by about 80% from the bottom in order to make you whole again. I mention those two to emphasize that your investment return is not just a function of the price of a stock index. Dollar cost average. It's rare that you will actually face the situation of putting (say) $100,000 into the market all at once, let it sit for 10-20 years, then take it all out at once. The situation you face is closer to putting about $1000 into the market every month for 100 months. If you do that, then you're getting a different price for each purchase you make. Your actual return will be a weighted average of the return from each of those purchases. But note that this could help or hurt you. Using the chart Victor showed in his answer, if your lost decade is from one peak to the next peak, your average price will be below the price you would have entered and left at. So this helps. But if your lost decade is from trough to trough, then your average price is higher than the start and end price, so this has hurt you. Those are the two extreme cases, and the general case will be somewhere in between. And you can use these regular purchases to help you carry out your regular rebalancing. Foreign equities. Since you mention the S&P500 specifically, I assume that you are in the United States. The US equities is approximately 45% of the world equities market. So even if the S&P500 has a lost decade, it's unlikely that the rest of the world will also have a lost decade at the same time. For comparison, the Tokyo Stock Exchange is the third largest in the world (behind the US's NYSE and NASDAQ); the market cap of the TSE is less than 20% that of the combined market cap of the NYSE and the NASDAQ, which puts it at about 10% of the world's market cap. When the Nikkei had its lost decades, no one else had a lost decade. Note that buying foreign equities is more expensive than buying domestic, and it exposes you to fluctuations in the exchange rate of the currencies. But the benefit of diversification probably outweighs those downsides. And obviously it's easier to diversify away from Japan than it is to diversify away from the United States. But there are people who advocate holding exactly the market weight of every country in the world." John Bogle never said only buy the S&P 500 or any single index Q:Do you think the average person could safely invest for retirement and   other goals without expert advice -- just by indexing? A: Yes, there is a rule of thumb I add to that. You should start out   heavily invested in equities. Hold some bond index funds as well as   stock index funds. By the time you get closer to retirement or into   your retirement, you should have a significant position in bond index   funds as well as stock index funds. As we get older, we have less time   to recoup. We have more money to protect and our nervousness increases   with age. We get a little bit worried about that nest egg when it's   large and we have little time to recoup it, so we pay too much   attention to the fluctuations in the market, which in the long run   mean nothing. How much to pay Q: What's the highest expense ratio that one should pay for a   domestic equity fund? A: I'd say three-quarters of 1 percent maybe.   Q: For an international fund?  A: I'd say three-quarters of 1 percent.   Q: For a bond fund? A: One-half of 1 percent. But I'd shave that a little bit. For   example, if you can buy a no-load bond fund or a no-load stock fund,   you can afford a little more expense ratio, because you're not paying   any commission. You've eliminated cost No. 2.... Common financial advice is just that - it is common and general in nature and not specific for your financial needs, your goals and your risk tolerance. Regarding the possibility of a US market not going anywhere over a long period of time, well it is not a possibility, it has happened. See chart below:  It took 13 years for the S&P 500 to break through 1550, a level first reached in March 2000, tested in October 2007 (just before the GFC) and finally broken through in March 2013. If you had bought in early 2000 you would still be behind when you take inflation into account. If you took the strategy of dollar cost averaging and bought the same dollar value (say $10,000) of the index every six months (beginning of each January and each July) starting from the start of 2000 and bought your last portion in January 2013, you would have a return of about 35% over 13.5 years (or an average of 2.6% per year). Now lets look at the same chart below, but this time add some trend lines.  If we instead bought whenever the price crossed above the downtrend-line and sold whenever the price crossed below the uptrend-line (with the first purchase at the start of January 2000), we would have a return of 93% over the 13.5 years (or an average of 6.9% per year). Another more aggressive option (but manageable if you incorporate a risk management strategy) is to buy long when the price crosses the downtrend-line and sell your existing long position and sell short when the price drops below the uptrend-line. That is profiting both up-trending and down-trending markets. Again we start our buying at the start of January 2000. By shorting the index when the market is in a down-trend you could increase the above returns of 93% by another 54%, for a total return of 147% over 13.5 years (or an average of 10.9% per year). To conclude, using a simple long term strategy to time the markets may result in considerably higher returns than dollar cost averaging over the medium to long term, and I know which strategy would help me sleep better at night. Generally, you need something that goes up over time during periods of index decline, but otherwise holds some value.  Historically, people tend to use gold for that purpose.  But with gold also set up for possible declines, that raises questions.  Silver has dropped a bit more than gold in terms of percentages.  If you think the downward motion will be in the form of sudden jumps, you can look at putting some of your money in puts away from the current price, but you can easily wind up paying too much for this protection.   In the case of a deflation, most things lose value vs. money, and you want all cash. These things might already be obvious.  I don't think there is a clear answer to your question.  But if the future were clear, the present market could possibly anticipate and adjust... one reason the future of the market always seems a bit murky.
If the ship is sinking, switching cabins with your neighbor isn't necessarily a good survival strategy. Index funds have sucked, because frankly just about everything has sucked lately. I still think it is a viable long term strategy as long as you are doing some dollar cost averaging.  You can't think about long term investing as a steady climb up a hill, markets are erratic, but over long periods of time trend upwards. Now is your chance to get in near the ground floor.  I can completely empathize that it is painful right now, but I am a believer in market efficiency and that over the long haul smart money is just more expensive (in terms of fees) than set-it-and-forget it diversified investments or target funds. "Making these difficult portfolio decisions for you is the point of Target-Date Retirement Funds.  You pick a date at which you're going to start needing to withdraw the money, and the company managing the fund slowly turns down the aggressiveness of the fund as the target date approaches.  Typically you would pick the target date to be around, say, your 65th birthday.  Many mutual fund companies offer a variety of funds to suit your needs. Your desire to never ""have to recover"" indicates that you have not yet done quite enough reading on the subject of investing.  (Or possibly that your sources have been misleading you.)  A basic understanding of investing includes the knowledge that markets go up and down, and that no portfolio will always go up.  Some ""recovery"" will always be necessary; having a less aggressive portfolio will never shield you completely from losing money, it just makes loss less likely. The important thing is to only invest money that you can afford to lose in the short-term (with the understanding that you'll make it back in the long term).  Money that you'll need in the short-term should be kept in the absolute safest investment vehicles, such as a savings account, a money market account, short-term certificates of deposit, or short-term US government bonds." If I were in your shoes, I would invest conservatively fully aware that for the next few years the stock market is going to be depressed, but then again, don't take that as advice.  Every situation is different, weigh the pros and cons carefully and if required, consult a qualified professional. You're saying that you're thinking of keeping 35% in cash? If you expect the market to plummet in the next few months and then head up again, this would be a smart strategy. Hold on to a bunch of cash, then when the market hits bottom buy, then as it goes back up collect your profits. In practice, the long-term trend of the market has been up for as long as there has been a stock market. Bear markets tend to be relatively short, usually just a few months or at most a year or two before the market gets back to where it was. If you are smart enough to predict when there will be a decline and how long it will last, you're smarter than 99% of the professionals, never mind the amateurs. Personally, I keep only trivial amounts of cash. Let's see, right now about 2% of my assets. If you're more active in managing your retirement accounts -- if you really watch the market on a monthly basis or more frequently and adjust your assets according -- it would make sense to keep a larger cash reserve and use it when the market goes down. But for the average person, I think it would be a big mistake to keep anywhere near 35% of your assets in cash. In the long run, you'll probably lose out on a lot of potential growth. Your asset mix should reflect your own risk tolerance.  Whatever the ideal answer to your question, it requires you to have good timing, not once, but twice. Let me offer a personal example. In 2007, the S&P hit its short term peak at 1550 or so. As it tanked in the crisis, a coworker shared with me that he went to cash, on the way down, selling out at about 1100. At the bottom, 670 or so, I congratulated his brilliance (sarcasm here) and as it passed 1300 just 2 years later, again mentions how he must be thrilled he doubled his money. He admitted he was still in cash. Done with stocks. So he was worse off than had he held on to his pre-crash assets. For sake of disclosure, my own mix at the time was 100% stock. That's not a recommendation, just a reflection of how my wife and I were invested.  We retired early, and after the 2013 excellent year, moved to a mix closer to 75/25. At any time, a crisis hits, and we have 5-6 years spending money to let the market recover. If a Japanesque long term decline occurs, Social Security kicks in for us in 8 years.  If my intent wasn't 100% clear, I'm suggesting your long term investing should always reflect your own risk tolerance, not some short term gut feel that disaster is around the corner. "I'll give the TLDR answer. 1) You can't forecast the price direction. If you get it right you got lucky. If you think you get it right consistently you are either a statistical anomaly or a victim of confirmation bias. Countless academic studies show that you can not do this. 2) You reduce volatility and, importantly, left-tail risk by going to an index tracking ETF or mutual fund. That is, Probability(Gigantic Loss) is MUCH lower in an index tracker. What's the trade off? The good thing is there is NO tradeoff. Your expected return does not go down in the same way the risk goes down! 3) Since point (1) is true, you are wasting time analysing companies. This has the opportunity cost of not earning $ from doing paid work, which can be thought of as a negative return. ""With all the successful investors (including myself on a not-infrequent basis) going for individual companies directly"" Actually, academic studies show that individual investors are the worst performers of all investors in the stock market." "If you're investing for the long term your best strategy is going to be a buy-and-hold strategy, or even just buying a few index funds in several major asset classes and forgetting about it. Following ""market conditions"" is about as useful to the long term trader as checking the weather in Anchorage, Alaska every day (assuming that you don't live in Anchorage, Alaska). Let me suggest treating yourself to a subscription to The Economist and read it once a week. You'll learn a lot more about investing, economics, and world trends, and you won't be completely in the dark if there are major structural changes in the world (like gigantic housing bubbles) that you might want to know about." Adding on to all the fine answers, you can consider selling a covered call. You will have to own a minimum of 100 shares. It will offer a bit of protection, but limit your upside. If your confident long term, but expect a broader market pull back then a covered call might give you that small protection your looking for. If you know the market will crash, you could opt for going short. However, if you think this is too risky, not investing at all is probably your best move. In case of crises, correlation go up and almost all assets go down. What are the risks pertaining to timing on long term index   investments? The risks are countless for any investment strategy.  If you invest in US stocks, and prices revert to the long term cyclically adjusted average, you will lose a lot of money.  If you invest in cash, inflation may outpace interest rates and you will lose money.  If you invest in gold, the price might go down and you will lose money.  It's best to study history and make a reasonable decision (i.e. invest in stocks). Here are long term returns by asset class, computed by Jeremy Siegel:  $1 invested in equities in 1801 equals $15.22 today if was not invested and $8.8 million if it was invested in stocks.  This is the 'magic of compound interest' and cash / bonds have not been nearly as magical as stocks historically. 2) How large are these risks? The following chart shows the largest drawdowns (decreases in the value of an asset) since 1970 (source):  Asset prices decrease in value frequently.  Financial assets are volatile, but historically, they have increased over time, enabling investors to earn compounded returns (exponential growth of money is how to get rich).  I personally view drawdowns as an excellent time to buy - it's like going on a shopping spree when everything in the store is discounted. 3) In case I feel not prepared to take these risks, how can I avoid   them? The optimal asset allocation depends on the ability to take risk and your tolerance for risk.  You are young and have a long investment horizon, so if stocks go down, you will have plenty of time to wait for them to go back up (if you're smart, you'll buy more stocks when they go down because they're cheap), so your ability to bear risk is high.  From your description, it seems like you have a low risk tolerance (despite a high ability to be exposed to risk).  Here's the return of various asset classes and how the average investor has fared over the last 20 years (source):  Get educated (read Common Sense on Mutual Funds, A Random Walk Down Wall Street, etc.) and don't be average! Closing words: Investing in a globally diversified portfolio with a dollar cost averaging strategy is the best strategy for most investors.  For investors that are unable to stay rational when markets are volatile (i.e. the investor uncontrollably sells their stocks when stocks decrease 20%), a more conservative asset allocation is recommended.  Due to the nature of compounded interest, a conservative portfolio is likely to have a much lower future value. Dummy example to explain this. Suppose your portfolio contained just two securities; a thirty year US government bond and a Tesla stock. Both of those position are currently valued at $1mm. The Tesla position however is very volatile with its daily volatility being about 5% (based on the standard deviation of its daily return) whole there bond's daily volatility is 1%. Then the Tesla position is 5/6 of your risk while being only 1/2 of the portfolio.   Now if in month the Tesla stock tanks to half is values then. Then it's risk is half as much as before and so it's total contribution to risk has gone down. The biggest challenge with owning any individual stock is price fluctuation, which is called risk. The scenarios you describe assume that the stock behaves exactly as you predict (price/portfolio doubles) and you need to consider risk. One way to measure risk in a stock or in a portfolio is Sharpe Ratio (risk adjusted return), or the related Sortino ratio. One piece of advice that is often offered to individual investors is to diversify, and the stated reason for diversification is to reduce risk. But that is not telling the whole story. When you are able to identify stocks that are not price correlated, you can construct a portfolio that reduces risk. You are trying to avoid 10% tax on the stock grant (25%-15%), but need to accept significant risk to avoid the 10% differential tax ($1000). An alternative to a single stock is to invest in an ETF (much lower risk), which you can buy and hold for a long time, and the price/growth of an ETF (ex. SPY) can be charted versus your stock to visualize the difference in growth/fluctuation. Look up the beta (volatility) of your stock compared to SPY (for example, IBM). Compare the beta of IBM and TSLA and note that you may accept higher volatility when you invest in a stock like Tesla over IBM. What is the beta of your stock? And how willing are you to accept that risk? When you can identify stocks that move in opposite directions, and mix your portfolio (look up beta balanced portolio), you can smooth out the variability (reduce the risk), although you may reduce your absolute return. This cannot be done with a single stock, but if you have more money to invest you could compose the rest of your portfolio to balance the risk for this stock grant, keep the grant shares, and still effectively manage risk. Some years ago I had accumulated over 10,000 shares (grants, options) in a company where I worked. During the time I worked there, their price varied between $30/share and < $1/share. I was able to liquidate at $3/share. Passive implies following an index. Your question seems to ask about a hypothetical fund that starts, say, as an S&P fund, but as the index is adjusted, the old stocks stay in the fund. Sounds simple enough, but over time, the fund's performance will diverge from the index. The slight potential gain from lack of cap gains will be offset by the fund being unable to market itself.  Keep in mind, the gains distributed each year are almost exclusively long term, taxed at a favorable rate. "First, there will always be people who think the market is about to crash. It doesn't really crash very often. When it does crash, they always say they predicted it. Well, even a blind squirrel finds a nut once in a while. You could go short (short selling stocks), which requires a margin account that you have to qualify for (typically you can only short up to half the value of your account, in the US). And if you've maxed out your margin limits and your account continues to drop in value, you risk a margin call, which would force you to cover your shorts, which you may not be able to afford. You could invest in a fund that does the shorting for you. You could also consider actually buying good investments while their prices are low. Since you cannot predict the start, or end, of a ""crash"" you should consider dollar-cost-averaging until your stocks hit a price you've pre-determined is your ""trigger"", then purchase larger quantities at the bargain prices. The equity markets have never failed to recover from crashes. Ever." "Your plan already answers your own question in the best possible way: If you want to be able to make the most possible profit from a large downward move in a stock (in this case, a stock that tracks gold), with a limited, defined risk if there is an upward move, the optimal strategy is to buy a put option.  There are a few Exchange Traded Funds (ETFs) that track the price of gold.  think of them as stocks that behave like gold, essentially.  Two good examples that have options are GLD and IAU. (When you talk about gold, you'll hear a lot about futures.  Forget them, for now.  They do the same essential thing for your purposes, but introduce more complexity than you need.) The way to profit from a downward move without protection against an upward move is by shorting the stock.   Shorting stock is like the opposite of buying it.    You make the amount of money the stock goes down by, or lose the amount it goes up by.   But, since stocks can go up by an infinite amount, your possible loss is unlimited. If you want to profit on a large downward move without an unlimited loss if you're wrong and it goes up, you need something that makes money as the stock drops, but can only lose so much if it goes up.   (If you want to be guaranteed to lose nothing, your best investment option is buying US Treasuries, and you're technically still exposed to the risk that US defaults on its debt, although if you're a US resident, you'll likely have bigger problems than your portfolio in that situation.) Buying a put option has the exact asymmetrical exposure you want.   You pay a limited premium to buy it, and at expiration you essentially make the full amount that the stock has declined below the strike price, less what you paid for the option.   That last part is important - because you pay a premium for the option, if it's down just a little, you might still lose some or all of what you paid for it, which is what you give up in exchange for it limiting your maximum loss. But wait, you might say.  When I buy an option, I can lose all of my money, cant I?  Yes, you can.    Here's the key to understanding the way options limit risk as compared to the corresponding way to get ""normal"" exposure through getting long, or in your case, short, the stock: If you use the number of options that represent the number of shares you would have bought, you will have much, much less total money at risk. If you spend the same ""bag 'o cash"" on options as you would have spent on stock, you will have exposure to way more shares, and have the same amount of money at risk as if you bought the stock, but will be much more likely to lose it. The first way limits the total money at risk for a similar level of exposure; the second way gets you exposure to a much larger amount of the stock for the same money, increasing your risk. So the best answer to your described need is already in the question:   Buy a put.  I'd probably look at GLD to buy it on, simply because it's generally a little more liquid than IAU. And if you're new to options, consider the following: ""Paper trade"" first.  Either just keep track of fake buys and sells on a spreadsheet, or use one of the many online services where you can track investments - they don't know or care if they're real or not. Check out www.888options.com.  They are an excellent learning resource that isn't trying to sell you anything - their only reason to exist is to promote options education.   If you do put on a trade, don't forget that the most frustrating pitfall with buying options is this:  You can be basically right, and still lose some or all of what you invest.  This happens two ways, so think about them both before you trade: If the stock goes in the direction you think, but not enough to make back your premium, you can still lose.  So you need to make sure you know how far down the stock has to be to make back your premium.  At expiration, it's simple: You need it to be below the strike price by more than what you paid for the option. With options, timing is everything.  If the stock goes down a ton, or even to zero - free gold! - but only after your option expires, you were essentially right, but lose all your money.  So, while you don't want to buy an option that's longer than you need, since the premium is higher, if you're not sure if an expiration is long enough out, it isn't - you need the next one. EDIT to address update: (I'm not sure ""not long enough"" was the problem here, but...) If the question is just how to ensure there is a limited, defined amount you can lose (even if you want the possible loss to be much less than you can potentially make, the put strategy described already does that - if the stock you use is at $100, and you buy a put with a 100 strike for $5, you can make up to $95.   (This occurs if the stock goes to zero, meaning you could buy it for nothing, and sell it for $100, netting $95 after the $5 you paid).   But you can only lose $5. So the put strategy covers you. If the goal is to have no real risk of loss, there's no way to have any real gain above what's sometimes called the ""risk-free-rate"".  For simplicity's sake, think of that as what you'd get from US treasuries, as mentioned above. If the goal is to make money whether the stock (or gold) goes either up or down, that's possible, but note that you still have (a fairly high) risk of loss, which occurs if it fails to move either up or down by enough.  That strategy, in its most common form, is called a straddle, which basically means you buy a call and a put with the same strike price.  Using the same $100 example, you could buy the 100-strike calls for $5, and the 100-strike puts for $5.  Now you've spent $10 total, and you make money if the stock is up or down by more than $10 at expiration (over 110, or under 90).   But if it's between 90 and 100, you lose money, as one of your options will be worthless, and the other is worth less than the $10 total you paid for them both."