If you follow financial news, perhaps you noticed that the Japanese stock market has recently returned to its historical peak after 34 years.  On February 22, 2024, Japan’s Nikkei 225 index closed at 39,098.68, surpassing its December 29, 1989, peak of 38,915.87.  Several media outlets have referred to this as 34 years of ZERO stock market returns.

     What happens when the stock market is flat for 34 years?  Has an entire generation of Japanese investors really received zero returns from their stock market investments?  Since the U.S. S&P 500 Index has also recently crossed its own historic peak of 5000, could this happen here?  In this post, I explore what a flat market actually means for investors and discuss lessons from Japan’s long, cold investing winter.

historical returns

Japan’s Returns

     While it is true that if you invested $1 at the peak in 1989 and did not reinvest dividends, you would still have $1 thirty-four years later, this doesn’t tell the whole story.  This one-time lump-sum method of investing differs from the average person in several ways.


     The Nikkei has had an average yield of 1.1% over the past 34 years.  If you reinvested these dividends, $1 would have become $1.45.  This isn’t much, but it also isn’t zero.  By comparison, dividends for the S&P 500 over that same time span have averaged 1.38%.


     When discussing historical stock market returns, nominal returns are usually quoted.  Nominal returns do not include inflation.  Real returns are adjusted for inflation and represent the actual increase in purchasing power from your investment results.  The Nikkei’s low average nominal yield has been slightly offset by incredibly low inflation over the same period.  Since 1990, Japan’s average inflation rate has been 0.58%, including many years of deflation (negative inflation).

Dollar-Cost Averaging (DCA) 

     Unless you inherit a large sum or sell a business, most people don’t contribute once and never invest again.  Dollar-cost averaging is investing money into the stock market regularly over time.  For most people, this is naturally how they invest as they earn money in their jobs.  Whether through a retirement plan or a brokerage account, the average investor contributes a little with every paycheck or at regular intervals over time.  Investing an equivalent amount of money each month or year allows you to buy more shares of an index when the price is lower and less when the price is higher.

     DCA does more than you might realize.  It can increase your returns over time in a “flat market.”   Consider an average Japanese investor engaging in DCA, or in this case, YCA.  The average return of the Nikkei over the past 34 years has been 0%.  If an investor contributed $34 at the beginning of 1990, it would still be worth $34 today or $49.32 if dividends were reinvested.  If, instead, they had performed DCA and contributed $1 at the beginning of 1990 and invested an additional $1 each year for the next 34 years while reinvesting the dividends, it would be worth $108.69 today.  This is an average annual compounded return of 6.21%.  With the low level of inflation, the annualized real returns (inflation-adjusted) were 5.63%.  Not bad for a flat market.

Sequence of Returns (SOR)

     It isn’t just the absolute investment returns that matter.  The sequence of your returns also has a significant impact on your investing journey.  We can break your investing lifespan into two phases: accumulation and decumulation.  Accumulation is when you work and regularly invest part of your salary in the market.  According to research from Janus Henderson in 2023, the average age for first-time investors in the U.S. is 32 for women and 35 for men.  If these investors continue to make contributions until they retire, they will have an accumulation lifespan of roughly 30 years.

     Decumulation begins at retirement when you are no longer contributing to your investments and begin to draw them down.  Your sequence of returns poses different benefits and risks during each phase.  In the case of Japan, there was a bubble-like market run-up in the late 1980s, just before the crash.

     Investors in Japan had very different outcomes depending on when they started investing in relation to the 1989 peak.  The following graph demonstrates the average annualized compounded returns using DCA for all 30-year investing periods from 1960-2009.  These numbers assume that a consistent amount is invested on January 1 of each year.  Results are through April 1, 2024, and include reinvested dividends.


 It is instructive to break these investing periods into three categories of investors based on when the market crashed:  those approaching retirement who began investing in 1960-1970, those in the middle (1971-1990), and those starting out (1991-2009).

Approaching Retirement (1960-1970)

     Segment one (green) shows investors approaching retirement at the time of the market downturn.  Those who began investing in 1960 completed their 30-year accumulation phase just as the market peaked at the end of 1989 and, therefore, had the highest annualized returns.  Every yearly cohort in this group averaged over 5% during their accumulation phase, with the returns generally decreasing the closer the investing start date was to the market crash.

Mid-Career (1971-1990)

     As shown in segment 2 (red), investors averaged returns below 5% during their 30-year DCA period.  Members of this mid-career group who began investing from 1979-1983 had negative returns for their entire 30-year accumulation phase, which was the worst-case scenario.  Note that 1979 was ten years before the market crashed!

Starting Out (1991-2009)

     Finally, during the third segment (blue), investors generally averaged returns over 5%, with the later start dates having higher returns as the market returned to its historical peak.  For those who began investing in 1995 or after, they have yet to complete an entire 30-year period, so their ultimate returns are still to be determined.


What Goes Around Comes Around

     Figure 3 shows the annualized returns of the decumulation phase.  Only the 1960-1964 cohorts have 60 years of data (30 years of accumulation and 30 years of decumulation), with the other cohorts including returns through April 1, 2024.

Approaching Retirement (1960-1970)

    The approaching retirement group received good returns during the accumulation phase and poor returns during the decumulation phase.   Unsurprisingly, the 1960 cohort fared the worst, with negative annualized returns over their 30-year decumulation phase.  This is sequence of return risk (SORR) in action!  This cohort had the best run-up, but because the crash began in their first year of retirement (decumulation phase), their retirement returns were affected most dramatically.

     This is exactly why it is prudent to include more fixed-income investments like bonds in your portfolio as you approach retirement.  You may be comfortable with 100% stocks when you are 30, but you should be closer to 60% stocks / 40% bonds when you are nearing retirement age.  Japanese investors in this group (green) could have reduced their risk as they approached retirement by rebalancing their portfolio into bonds as stock prices surged in the late 1980s.

Mid-Career (1971-1990)

     The mid-career group had mixed returns; good during the first half of their accumulation phase, then poor during the second half.  Their decumulation phase started with poor returns but significantly improved over the second half.  The accumulation phase was particularly harsh for this group, so, it is fortunate that their decumulation phase returns improved.  However, as you will see in Figure 4, they still have the lowest annualized returns of any group.

Starting Out (1991-2009)

     The starting-out group has a limited amount of data.  Even the 1991 cohort only has four years of decumulation returns.  The limited results for this group reflect the high returns of the Nikkei in the past few years.  The jury is still out on the long-term results for this group.

japan's stock market returns

Putting it all Together 

     Figure 4 plots the entire investing lifetime of a typical investor in the Nikkei Index.  Mirroring a working career, yearly contributions were only made during the initial 30-year period, and the investments have been carried out through 60 years or through April 1, 2024, whichever is longer.

      Overall, the average Japanese annualized returns during the period studied have been well below historical American averages.  But most Nikkei investors have still managed to have decent returns, in the 4-10% range, over their lifetimes.   Unfortunately, for the Japanese cohorts that began investing between 1979 and 1983, their annualized returns have been low, with 1982 being the worst year, producing a 2.61% return over 43 years!

     The only positive for these investors is that they began investing only 6-10 years before the crash and were well aware of their poor returns during their careers.  They had decades of working life left to make investing adjustments.  They could have contributed more money, worked longer, or decreased their lifestyle to compensate for their subpar investing results.

The American Counterpart

     Could something like this happen in the U.S.?  It already has.  The U.S. stock market peaked in September 1929 and did not regain that level for 25 years.  It finally got “back to zero” in November 1954.  While not quite as prolonged as Japan’s, the American downturn had lower lows, with the market losing 89% of its value.  It also sparked the Great Depression, which lasted until 1938 but had lingering effects.  There was also a World War during this period for good measure!

stock market returns

There are marked differences between the two downturns.  First, the S&P 500 paid a significantly higher dividend yield during the Great Depression, averaging 5.71% from 1929-1954!  It was common to return money to shareholders through dividends during this era.  Next, despite severe deflation from 1930-1933, the average inflation rate during these 25 years was 1.88%, over three times the rate during Japan’s 34-year period.

     There are similarities between these two periods as well.  Most notable were the results of DCA.  If an investor began contributions on January 1, 1929, and continued yearly until 1954, the total compounded returns, including dividends, were 12.1%.  Dividends significantly boosted these returns but were still a healthy 7.19% without dividends.  The annualized real returns (inflation-adjusted) were 10.22%!

Lessons Learned

Lesson 1:  Beware the Mania

     I was 14 years old when the Nikkei hit its peak in 1989, and even though I had no interest in investing or finance, I remember the general feeling about Japan at that time.  The Japanese takeover seemed inevitable.  Their economy was booming.  Japanese companies were buying American counterparts.  Japan was manufacturing and exporting the latest technology and building better cars.  No one thought the U.S. could compete.

     I felt those same vibes surrounding internet stocks in the late 1990s and the real estate market in the mid-2000s.  Although I wasn’t alive in the late 1920s, I’m sure it felt the same way.  It is the mania of the bubble, and the first lesson is that all bubbles eventually burst.

Lesson 2:  Just Keep Investing

     A flat market does not mean zero returns if you continue to invest through dollar-cost averaging and reinvest your dividends.  For those just starting out in investing, a market downturn is a blessing in disguise as you get to buy the market index on sale.  Even if the market is flat for 25 or 34 years, you can still have a positive return if you just keep investing.

Lesson 3:  The Closer to Retirement, the More a Downturn Affects You

     Your sequence of returns matters, so as you are approaching retirement, it is best to reduce your risk by increasing your portfolio’s percentage of bonds.  The 4% Rule has a 96% success rate at 30 years with a 50/50 stock/bond portfolio composition.  You shouldn’t be 100% in stocks as you approach retirement for this reason.

Lesson 4:  Don’t Put All Your Eggs in One Market

     There are periods when the entire world is having financial problems simultaneously.  The Great Recession, from December 2007 – June 2009, comes to mind.  Most of the time though, a prolonged downturn will be less widespread.  While the Japanese market has floundered over the last 34 years, the American market has thrived.  And this was during a period of increased globalization.

     It makes sense to diversify beyond the borders of your home country, especially if you do not live in the U.S.  However, even American investors need to look outside of their own country.  I do not believe, as others have postulated, that the S&P 500 is diversified enough through its foreign investments to completely reduce the risk of a prolonged U.S. downturn.  While most of my portfolio is American-centric, I also invest in a total-world international fund.  I hope Japanese investors were similarly diversified.

     I hope you have enjoyed this examination of Japan’s prolonged bear market.  If you have, please subscribe to catch all upcoming posts from Business is the Best Medicine.  If you have any questions, please leave them in the comments below. 



Nikkei 225 Returns https://www.macrotrends.net/2593/nikkei-225-index-historical-chart-data

Japan’s Inflation Data https://www.macrotrends.net/globalmetrics/countries/JPN/japan/inflation-rate-cpi

S&P 500 Returns https://www.macrotrends.net/2526/sp-500-historical-annual-returns

U.S. Inflation data https://www.investopedia.com/inflation-rate-by-year-7253832