Stocks recover from crashes?

It's easy for Americans to be led astray. We've had a good century in the capital markets. Stocks have marched upward with a real annual return of 6.6%. They have recovered from every correction and gone on to new highs. Buying on dips was a way to get rich.

In late 1989, when the Nikkei Index hit 39,000, it was settled science that the Japanese had all the economic answers. The Nikkei is struggling to crawl above 15,000 in year 2014. For a Japanese investor the cumulative real return on local stocks over the 25 years through 2014 is going to come in at around -50%.

The compound annual return on Russian stocks over the past 100 years in year 2014 is -100%.

Divide your retirement assets into two pots. The stock pot gets two-thirds of the money. Over the next quarter-century it will probably give you a real return near 5% a year. That's with dividends added and inflation subtracted. But it might hand you a disaster.

The other third goes into bonds. They will probably earn a lot less, between 1% and 3% a year. But they are an insurance policy. They may save you from disaster.

Forbes: The Japan Syndrome - William Baldwin (2014)