Here are the stock market charts you haven’t seen


You were always told stocks always go up over the long-term, and that every disaster is just another buying opportunity. And, that market crashes are temporary and the market always recovers.

Here’s the reality:

  1. Short periods of tremendous performance are followed by long-periods of underperformance and even negative growth. This is called a “mean-reversion event”. These happen a lot more often than you’d think.
  2. There are no guarantees in the stock market. Equities are inherently speculative because the growth of the stock market hinges on technological innovations and disruption of entrenched players. Those don’t happen like clockwork. They happen in fits and starts and are incredibly difficult to predict.
  3. The stock market spends something like 90% or 95% of the time retracing and recovering from losses. Most investors benefited from higher dividends in the past… dividends which have been shrinking almost in a straight line since the 1930s.
  4. If you could consistently buy at or near the lows and sell at or near the highs, you would make a lot of money and minimize your losses.

There is no doubt investors make money investing in stocks. The problem is with #2 and #4 — predicting who the disruptive innovators will be and then… predicting the tops and bottoms so you can capitalize on it.

Most people realize, on some level, that they are not professional stock pickers or market timers. So… they just buy and hold, and hold, and hold. They hire a professional money manager or… as is so common today, they just buy an index fund and forget about it.

And, they rely on long-term historical averages to predict their long-term future returns. But, is this sensible?

Edward McQuarrie, professor emeritus at the Leavy School of Business in Santa Clara University casts doubt on the historical record, claiming that it’s not as simple and clear-cut as we’ve been led to believe.

His paper, Stock Market Charts You Never Saw, explains that:

During the 1852 to 1932 period, inflation was intermittent, with long spells of deflation; dividends accounted for almost all of total return; and of course, 1932 was no kind of top for stocks… During this eighty-one year period stocks went nowhere, ending slightly below where they began. Or more exactly, stocks did go up, again and again, but always came back down, again and again. Lows were revisited, sometimes decades later, as in 1921. Sideways movements also occurred, several lasting for over a decade. True, successive highs were higher, but in part, that’s because the fluctuations became more extreme with time: higher highs were also followed by steeper plunges. Two declines of over 70% occurred toward the end of the period, in contrast to the smaller declines on the order of 50% seen earlier. After holding on for eighty-one years, a stock investor had gained less than nothing.

Here is what McQuarrie is referring to:

80 years of negative growth in stocks.
* Source: Stock Market Charts You Never Saw

McQuarrie also looks at a slightly more recent time period between 1919 and 1949:

30 years of very low growth in stocks.
* Source: Stock Market Charts You Never Saw

In both cases, the returns on stocks were abysmal for the time period.

Why use a start date of 1852 or 1919? Because those dates are just as arbitrary as Ibbotson’s 1926 start date, and they fall outside of the date range commonly used to “predict” future returns.

Put more plainly, for every cherry-picked date range that shows stocks soaring, there are cherry-picked date ranges that show the opposite. Or, to put even more plainly: no one can predict the future. What they can do is manipulate the data to make stocks look amazing.

You cannot control when you’re born, or when you die. You cannot predict what technological innovations will change your life 30 years from now. You cannot predict a personal emergency or a global pandemic. You cannot control when you start investing and when you are eventually forced to stop and draw an income off your savings.

So many of the predictions in financial planning are predicated on things totally beyond your control.

Does that make any sense?

Of course, you absolutely can look at this and see something different. You can find time periods where stocks did amazing. Look at the period from about 1857 to 1928, just before the big crash. Things look amazing. You may end up investing in a time period like that and make a lot of money. Or, you may end up investing right after a big stock market crash (like in 1929), and then make a killing as the market rebounds.

But, you could also invest in a time period that looks more like 1852 to 1919 — where you experience essentially no growth at all. You didn’t really lose money (or if you did, it was minimal), but you invested for 67 years and not make any money. That is a long time to wait to earn… nothing.

Pollyannas and permabulls will argue that “today’s stock market is different… it’s a ‘deeper’ and more intelligent market… it’s a more sophisticated market.” It sure is a different market.

But… different how?

Markets are not omniscient. Investors make mistakes. If 2008 taught us anything, it’s that mathematical models are not predictive and unexpected events can cause sharp corrections that wreak havoc on a retail investor’s portfolio. Look at the events earlier this year. There was no economic or financial model that predicted a global pandemic and subsequent lockdowns by governments.

So, while stocks can and do bounce back, you might not. The stock market is immortal — individual investors are not. The stock market has no time horizon — individual investors do. And, when investors lose money, it is possible for them to recover losses, but… it is also true that time does not heal all wounds… especially for individuals in their 60s or 70s (or even 50s). At some point, investors must accept the fact that the juice isn’t worth the squeeze.

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