Many people advise that one should invest money in indexes like the S&P 500 because they always grow in the long term.
Is it possible that the S&P 500 could fall to its early 1990s level? What situation could cause that?
Should I be afraid making a long-term investment (15-20 years and more)?
Is it POSSIBLE? Of course. It's possible that aliens will invade tomorrow. It's even possible that a politician will tell the truth some day. Is it LIKELY that the S&P will plummet to 1990s levels? Not very.
In 1990 the S&P was running at around 340. Today it is around 3,800. Could it fall by 90% in the new few weeks? Yes ... but not very likely.
Historically, the stock market has always gone up in the long term. Is that a 100%, iron-clad guarantee that it will do so in the future? Of course not. But it's a pretty safe bet. Even in the worst stock market crash in US history, 1929, the Dow Jones returned to its 1929 high in 1954. And if you adjust for the deflation that happened during the 1930s, the Dow had recovered by 1936. (https://www.livemint.com/Money/Oww1BVK1roWvXRUCd0VjIJ/25-years-to-bounce-back-from-the-1929-crash-Try-fouranda.html)
For the stock market to fall 90% would require a major economic collapse. There would almost certainly be massive unemployment, thousands of businesses large and small going bankrupt, and millions of people suddenly thrown into poverty. There would probably be rioting in the streets. In such a situation, losing value from your retirement fund would probably not be the top thing on your list of worries.
Smaller losses are more realistic. During the early 2010's my retirement fund lost value several years in a row. Not 90%, more like a few percent a year, but steady losses year after year.
In any case, is this a reason not to invest in the stock market? I'd say, what else are you going to do with your money? Are you going to invest in real estate? That could plummet to. Gold? Ditto. If you're really worried that civilization is going to collapse, maybe the smart thing to do would be to buy land in some remote place, build a bunker, and stock it with non-perishable food, medicine, and ammunition. But then if civilization does NOT collapse, that would turn out to be a pretty poor investment.
Every investment is a gamble. All you can do is make your best judgement of what you think is likely to happen in the next few years or decades, consult experts, etc.
Yes. Period. There is no possible other answer because you say "hypothetically". Hypothetically it is POSSIBLE it goes to 0. Possible is not likely. You formulated the question in a way that has only one valid answer.
What situation can cause that?
How long you want the list to be? From "asteroid impact" to "religious civil war" to "communism making all stocks evil and taking them".
Should I be afraid of it if I do long-term investment (15-20 years and more) or in such situation I lose my money anyway?
That is illegal to answer as investment advice is illegal here.
Let's try to make a realistic and practical answer without invoking extreme hypotheticals.
Let us address the three sentences in the question:
Many people advise that one should invest money in indexes like the S&P 500 because they always grow in the long term.
Any people who literally said that are fools.
There are two separate, specific, and important reasons they are fools:
See the horror here: link
Indeed, in the Nikkei example it did in fact recover ... after right on 40 years. So, if you were 40 years old and you invested - great news! - when you are 80 years old your money has got back to precisely where it started (that's nominal money, not even considering that inflation has made it worth nothing).
Is it possible that the S&P 500 could fall to its early 1990s level? What situation could cause that?
The story of the S&P is that
As if needed, here I indicate the run-up:
Say you arrived from Mars this afternoon. Like any alien, your only interest is trading the markets. You have to report to home base with a summary of Earth. Your summary would be:
"So, the S&P ran up 6x from Monday in 2009 through today."
That's all you'd say.
Everything else is: trivia. You wouldn't mention oil, wars, the invention of the internet, Tom Brady being the goat, or anything else. You'd just say "So, the S&P ran up 6x from Monday in 2009 through today."
Whenever there's a run-up there's a pullback. End of story.
Pullbacks are usually half the runup. But whatever, it might be "merely" 30% or maybe 70%.
This means ............. you face an incredible problem.
The issue "Whenever there's a run-up there's a pullback" creates the most difficult problem in life.
You have two approaches:
Assume that the pullback is coming. Sensibly don't invest, because you could lose your money at a stroke!
Jump on, it is obviously and clearly going up, so jump on.
And there's the rub.
You're "damned if you do and damned if you don't."
With option 1: the S&P could easily double or triple again. There's absolutely no way to know "where we are" in the runup. If you miss the double, you have missed literally the one chance in your life for a double. You have completely, utterly, blown your whole life investment story.
With option 2: the pullback could start tomorrow, at, let's say, 11:25. So in 10 years folks will say "How interesting, the S&P has gone straight down since Friday Jan 22 at 11:25. Wow, if you invested your money at 11:24, you would feel really suck just now."
Both options are a complete nightmare.
Should I be afraid making a long-term investment (15-20 years and more)?
The run-up has lasted since that Monday for 11ish years now. Pullbacks are usually shorter than runups (they are more violent, faster).
Will there be a recovery after the pullback? Yes. (Just as with even the Nikkei ultra-disaster.)
When will the pullback happen? Utterly unknowable. Could be tomorrow or 10 yrs from now. It's perhaps reasonable to guess "some time" in the "coming 10 years".
So after the pullback, when will it have recovered?
There's the rub. Your question ...
Should I be afraid making a long-term investment (15-20 years and more)?
... is simply equivalent to asking "will the coming pullback-recovery of the S&P be over and done with by 20 years from now?"
If you look at the Nikkei example, "you're screwed". Conversely, you can find many other examples where the "waiting period" in major market pullbacks is more like 15 years in total.
To copy and paste for a summary:
Your question ...
Should I be afraid making a long-term investment (15-20 years and more)?
... is equivalent to asking "will the coming pullback-recovery of the S&P be over and done with by 20 years from now?"
I'm gonna give a second answer, a direct and specific answer to the sense of the actual headline question:
Answer,
pullbacks are typically half the runup.
If the pullback comes tomorrow, the S&P will fall to about 2000.
If the S&P runup continues to (pick a number) 8000, the pullback will be to about 5000. And so on.
So no: the pullback following the current runup will not be to about 500.