Select Page

Conventional investing wisdom tells you to park your cash in an index fund and then sit back and relax.

Stock market corrections and bear markets? Don’t worry about them – the market always goes up.

Is this true? Does the market really always go up?

I’d like to present what I believe are two major flaws in this analysis.

  1. It focuses on “all-time” performance and neglects significant time periods
  2. Performance data is relatively limited

For the sake of our analysis, we will reference the S&P 500 chart adjusted for inflation.

S&P 500 Adjusted for Inflation


Flaw #1: “All-Time” vs. “Your Time”

If you look at an S&P 500 chart (which we will refer to as “the market”), it’s clear that the longest-term trend is an uptrend. The market is trading higher now than it was in 2000, 1950, 1900, and so on.

This is re-assuring, but it’s hardly relevant to the individual investor. Chances are, you didn’t start investing in 1880. Investors are only active for a few decades. If you start investing at the age of 20, you mostly care about the performance for the next 40-50 years so you are set for retirement. If you start at 30, make that 30-40 years. If you start at 40, make that 20-30 years. You get the point.

“All-time” performance is irrelevant to you. “Your time” performance matters (the time period during which you are investing).

Let’s take another look at that all-time performance chart. The market basically has flat returns between 1880 and 1950.

S&P 500: 1880-1950

Same for 1910-1950:

SP 500 1910-1950

And once again for 1970-1990:

SP 500 1970-1990

Of course, this analysis doesn’t account for dollar-cost averaging, a method in which investors make continuous contributions to their investment accounts over set intervals of time. With dollar-cost averaging, you may make money during the period highlighted above. That said, you may have also gotten shaken out of positions in a panic and lost money.

Dollar-cost averaging also doesn’t account for the emotions associated with holding losing positions (and the times at which you need to make withdrawals). The S&P 500 is now up over 400% from the lows of the 2008 recession. Before this massive recovery, the market dropped a whopping 50% over the course of just under two years. Could you stomach watching your accounts drop 50% for years without knowing when the end is in sight?

“The market always goes up” is less comforting when you’re $1 million nest egg just got a $500,000 haircut. Furthermore, what if you planned to retire in 2008? What if you were already 10 years into your retirement?

Once again, “your time” is more relevant than “all-time.”

This also leads to an issue with “all-time.”

Flaw #2: “All Time” Is Not That Long

Data-driven investment wisdom reminds us that “the market always goes up” and the long-term charts back this up. But how long is “long-term” really?

This chart shows us the performance of the S&P 500 since 1880, roughly 140 years.

To many, 140 years seems like a lifetime. And it is (just under two average lifetimes to be exact). While this data is certainly significant, it is also limited. 140 years really isn’t too significant in the scheme of human history. The New York Stock Exchange was only founded 228 years ago. Think about how much the world has changed since.

Here are just a few of the life-changing inventions that were created after the foundation of the NYSE:

  • Telephone – 1876
  • Electric light – 1879
  • Automobile – 1885
  • Airplane – 1903
  • Computer – 1939

At first glance, this data seems to negate the thesis I’m presenting – a lot has happened in the past 140 years! But, once again, this analysis would be short-sighted. These inventions are the products of thousands of years of modern human history. They are disruptors that couldn’t have been predicted 200, 500, or 1000 years ago.

Think about it this way.

People have been riding horses longer than they have been riding in cars.

People have been using candlelight longer than they have been using lightbulbs.

Before the invention of lightbulbs and automobiles, you could easily make the claim that candle usage and horse transportation will only increase over time. There was no data showing otherwise. And those were “inventions” with thousands of years of history. Stock market history is much shorter…

This point can also be illustrated by analyzing historical empires.

The Ottoman Empire lasted over 500 years. The Roman Empire lasted over 1000 years.

In hindsight, we know that the greatest empires have always fallen, but at the time, they seemed unstoppable.

The point is that a couple hundred years is a drop in the bucket with regards to human history. It’s certainly not enough time to make investment decisions with 100% confidence.

We see this trend in individual stocks as well. Stocks always go up – until they don’t…

Here is the Rite-Aid stock chart from 1969-2000:

Rite Aid Chart 1

And here is the Rite-Aid chart today:

Rite Aid Chart 2


Here is the GE chart from 1969-2000:

And here is the GE chart today:

There are hundreds of other charts that look just like this.

If you invested in Rite-Aid or GE between 1969 and 2000, data would tell you that these stocks always go up. If you invested after 2000, data would tell you that they always go down.

Of course, individual stocks are different than “the market.” The market adapts to changing trends, sector rotation, etc. The S&P 500 is constantly rebalanced and now includes companies that didn’t exist 100 years ago.

That said, the general takeaway is the same. Relying on a limited data set can lead to faulty conclusions.

In the grand scheme of things, market history isn’t all that significant.

So, What’s The Point?

The point of this post is not to warn of an impending market crash from which we will never recover. The point is that the word “always” has no place in the world of investing, especially when dealing with limited data sets. Diligent investors recognize that there is no certainty in the markets. Risk is always present. Investing solely off of the premise that “the market always goes up” is a faulty strategy.

Furthermore, history is made every day. You will continue to hear figureheads talk about market “firsts.” The first trillion-dollar company…. The fastest crash we’ve seen…..The longest bull market in history….etc.

As traders and investors, we rely on historical data to make decisions (and we should). But we should also remember that history is always changing and, as the SEC would love to remind us, past performance is not indicative of future returns.