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Investing

Stocks Don’t Always Rise Over the Long Term

Ask any investment professional about the risk of investing in stocks and they’ll likely say that given enough time stocks always rise.

Well, the Japanese stock market proves that stocks can indeed decline for decades. As you can see in the chart below, between 1989 and 2009 (20 years for those who can’t do the math) the direction of the Nikkei 225 was down. In fact, it has been 30 years and the Nikkei still is roughly half of it’s 1989 peak. So much for stocks always rising over the long run.

Nikkei 225 Index (Japanese stock market)

OK, but Japan is a special case, right? True, there are big cultural and economic differences between Japan and countries like America and Canada. But does that really mean US stocks can’t have a similar experience?

History as a guide.

Let’s look at inflation-adjusted total returns for the US stock market going back to 1872.

The table below shows how frequently someone investing in the US stock market would have experienced a negative real return over a 5, 10, 15 and 20 year period.

As you can see, there have been plenty of historical 5, 10 and 15 year periods where the US stock market experienced negative real returns. While there are no 20 year periods with negative returns, there was still one 19 year period (1943-1961) with a negative return.

Imagine investing your money today and barely breaking even after accounting for inflation by Christmas 2039. It has happened and it can happen.

Time Horizon% of Negative PeriodsWorst Annualized Return
5yr20.3%-11.7% (1916 - 1920)
10yr10.1%-4.1% (1911 - 1920)
15yr5.3%-2.1% (1906 - 1920)
20yr0%0.5% (1901 - 1920)

Moral of the story: There is no rule saying the US stock market always has to rise over long periods of time. And history proves this. Even if your time horizon is very long, investing is still risky. Of course, the chance of a poor outcome diminishes with time, but you must still consider the possibility. Still, one has to also consider the alternatives during periods in which stocks perform poorly. It may be that stocks remain the cleanest dirty shirt during these periods – i.e. the best of a range of poor investing options.

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