Imagine investing at the top of one of the world's most successful stock markets.
The economy is booming. Its companies are global leaders. Investors around the world want a piece of the action. The market has delivered extraordinary returns and there seems little reason to believe that will change.
Then it does.
And the stock market does not regain its previous high for more than three decades. Just let that sink in…
That isn't a hypothetical scenario.
It happened in Japan.
This is an estimated illustration and not a precise representation of markets since 1980.
When Japan looked unstoppable
During the 1980s, Japan was an economic powerhouse.
Japanese companies dominated industries ranging from electronics to automobiles, asset prices soared and, at its peak, Japan accounted for nearly half of global stock-market capitalisation.
By 29 December 1989, the Nikkei 225 had reached around 38,916.
Then the bubble burst.
Share prices collapsed. Property prices followed. Banks were left dealing with enormous problems and economic growth slowed dramatically. The years that followed became known as Japan's "Lost Decades".
The extraordinary part is just how long the recovery took.
It was not until 2024 that Japanese shares finally reached a new record high — roughly 34 years later.
That does not mean somebody regularly investing throughout those decades earned nothing. Dividends, reinvestment and buying shares at much lower prices would have produced a very different outcome from simply putting a lump sum into the Nikkei at its 1989 peak.
This is an estimated illustration and not a precise representation of markets since 1990.
The lesson isn't to avoid Japan
It would be very easy to look at that history and conclude:
"Don't invest in Japan."
I think that completely misses the point. The lesson is that the future can look very different from the recent past. In 1989, avoiding Japan might have looked ridiculous. It was one of the world's dominant stock markets.
Today, we could easily say something similar about America.
The US contains some of the most profitable and innovative businesses ever created. Companies such as Microsoft, Apple, Nvidia, Amazon and Alphabet operate around the world.
I own plenty of them through my funds, and I fully intend to continue doing so. But I don't assume their dominance means US equities must outperform forever.
That is an important distinction.
This is an estimated illustration and not a precise representation of markets since 1990.
America has already had a lost decade
We don't even need to travel to Japan to find an example.
Between January 2000 and December 2009, the S&P 500 produced a cumulative total return of around -9.1%.
An entire decade. Negative returns. Even including dividends. Other parts of the global market performed considerably better during that same period.
Yet after the extraordinary performance of American shares over more recent years, it is remarkably easy to forget that this can happen.
Could the S&P 500 experience another lost decade?
Of course it could.
That is not a prediction that it will. It is simply an acknowledgement that it can.
This is why I diversify
I don't diversify because I know which market will outperform next.
I diversify because I don't.
My portfolio contains US equities, UK equities, developed markets, Asia-Pacific companies and smaller businesses. At different times, some of those investments will look completely unnecessary.
That is almost inevitable.
If America continues dominating, I will probably wish I owned even more of it. If another region takes the lead, I will be pleased I didn't abandon it during the years when nobody seemed interested.
Diversification means accepting that part of your portfolio will nearly always disappoint you. The alternative is making one enormous assumption:
that today's winner will also be tomorrow's winner.
Japan is a spectacular reminder of why I don't want to make that bet. The market doesn't need to collapse tomorrow for diversification to make sense. It simply needs the future to remain uncertain.
Above all, that is one thing I am extremely confident about: no one can predict the future, and no one knows which markets are destined to perform best over the coming years or decades.
That is exactly why I believe it is so important to diversify my portfolio and will continue to do so.
The Compounder
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