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My view on what's going on in the financial markets and the global economy, and a few other things that might interest me from time to time.

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Stocks - do they always go up?

Updated: Jun 27, 2022

“Invest for the long haul. Don’t get too greedy and don’t get too scared.”

Shelby M.C. Davis


Do stock prices always go up? Obviously not, as we are finding out now. However, stocks do go up in the long run, recognising that exactly what “long run” means is open for interpretation. Stock prices certainly do not go up every single year, but the longer the time horizon, the more likely total returns on stocks are to be positive. To give you a sense of this, the compound average annual total return (nominal) of large cap stocks in the US since 1926 has been 12.3%. The average annual inflation rate over the same period has been 3.0%, meaning that stocks have generated on average a real total return of 9.4%/annum (rounding) over this period. However, the standard deviation of the annual total return on stock prices over the same period has been 19.6%, meaning that returns can vary sharply from year to year. To give you some flavour of the year-to-year volatility, annual returns (nominal) since 1926 for US Large Cap stocks have ranged from a low of -43.3% in 1931 to a high of 54.0% in 1933. Since 1950 though – a slightly more contemporary period – total returns on stocks have ranged from a low of -37.0% in 2009 to a high of 52.6% in 1952.

Stocks ideally should be held for long periods of time (at least 10 years) to ensure attractive returns. In your portfolio, the amount you allocate to stocks should represent money that is not needed in the short term given the volatility of the asset class year to year. Stocks should be held alongside other asset classes like bonds, real estate, precious metals, and various other asset classes. Perhaps most importantly, your portfolio should also include enough cash or cash equivalents so that you can pay expenses for six to 12 months without having to liquidate stocks – or any other asset class for that matter – during down periods. None of this is revolutionary advice – it is “personal finance 101” – but it is important for me to mention this before speaking specifically about long-term returns on equities.

For the work I have done in this article, I used total return data from 1926 to 2021 for “Large Cap Stocks” – essentially the S&P 500 – provided by Morningstar Direct and Ibbotson Associates. This analysis is based on total annual returns, consisting of three components: capital appreciation (or depreciation), dividends, and the reinvestment of dividends as they are received. I looked at this data over three periods:

  • 1926-2021 (95 years), the entire period for which data is available;

  • 1950 to 2021 (71 years), which excludes the Great Depression and WWII, highly volatile and rather unusual periods for stocks; and

  • 1985 to 2021 (36 years), which excludes the Great Depression and WWII, but also excludes the high inflationary period of the 1970s and early 1980s.

The table below shows compound average annual returns (nominal and real) and the standard deviations for each of the three periods I described in the paragraph above.

As you can see in this table, average annual total returns have actually improved and volatility has lessened over the more recent (and shorter) periods of time, perhaps reflecting a better understanding by both the government and Federal Reserve as to how to use fiscal and monetary policy, respectively, to influence economic cycles, especially to soften downturns. On the other hand, there could be an argument that returns over the more recent (higher return) periods will eventually drift towards the average return for the 95-year period. Only time will tell, but the main point of this table is to show that nominal and real returns of equities over very long periods have clearly been attractive.

Even though returns can vary sharply from year-to-year, ranging from highly negative to highly positive, returns are more likely to be positive the longer the holding period. The table below illustrates this reality for two of the periods I used earlier – the entire 95 year holding period (since 1926), and the 71 year period, starting in 1950, which excludes the Great Recession and WWII. Returns are summarised on an annual basis (1-year column), and are also presented over rolling periods of three-, five- and 10-years. For example, over the entire 95-year period, I looked at the 10-year average annual return for stocks from the beginning of 1926 to the end of 1935 (i.e. rolling 10 years), from the beginning of 1927 to the end of 1936, and so on.

As you can see in this table, the longer the hold period – meaning the time horizon that you hold stocks – the fewer the number of periods that stocks were negative over that period. This is true for both the full 95-year period and for the period since 1950. For example, whereas annual returns (i.e. the one-year column) have been negative 26.3% of the time between 1926 and 2021, they have only been negative 4.7% of the time over 10-year rolling periods for the same timeframe. The fact is that the longer your time horizon, the less likely you are to have a negative return over that horizon. The bottom row in the table for each period – labelled “number of periods with two consecutive years of neg returns” – is the number of times that returns were negative over consecutive periods. For example, for the 71-year period since 1950 (bottom half of table), there has been only one occasion when returns were negative in consecutive years over a 10-year holding period. This happened to be in 2008 and 2009 (during the Great Recession), meaning that 10-year returns were negative for the two periods 1998-2008 and 1999-2009. In fact, these are the only two 10-year periods since 1950 that rolling returns were negative, again supporting the thesis that the longer your holding period, the less likely you are to experience negatives returns.

Of course, I am fully aware that the investment time horizon for investors – especially since the pandemic – has almost certainly gotten shorter, reflecting three strong years of above-average returns (2019-2021) bolstered by unprecedented amounts of pandemic-related stimulus. The impressive total (nominal) returns of 31.5%, 18.4% and 28.7% for 2019, 2020 and 2021, respectively, inspired investors to pile into equities on the basis that “stocks go up every year”, something that could not be further from the truth as we are finding out now. The beginning of 2022 has been a stark reminder to investors that equities can be highly volatile and that returns can most certainly be negative. The narrative around stocks is quickly changing as a result, with even greater uncertainty thrown into the mix because of Russia’s invasion of Ukraine. For those investors that are not accustomed to severe volatility of prices of equities, a temporary downturn in stocks can be brutal, leading to many sleepless nights and second guessing. The most important thing you can do as an existing (or for that matter prospective) investor in the stock market is to do a “gut check” and make sure you can emotionally withstand periods of high volatility and downturns, which can last weeks, months or even years, not just days. The “buy the dip” mentality that has become so prominent and accepted during the pandemic is quickly losing steam. This social-media inspired approach appeared sound during the early stages of the pandemic, because it seemed to work time and time again. However, it is becoming increasingly clear now that this strategy of near instant gratification resonating from rapid-fire rebounds appears to be over. The final thing I wanted to speak about is market timing. All investors, including this one, believe that they have a knack for knowing when equities will rise and fall. About the only real truth one can espouse though brings us right back to my opening assertions of this article ­– over the long-run, stocks go up. If you fancy your ability to time markets, let me give you the good news and the bad news. As a base case, the compound average annual growth rate of equities since the beginning of 1950 has been 11.7%/annum, meaning that your investment at the beginning of 1950 would have increased 29.2x over this 71-year period. Had you been out of the market for the five best years during this run (1954, 1958, 1995, 1975 and 1997), the CAGR over the same 71-year period would have been reduced to 9.1%/annum, meaning that your initial investment would have increased only 5.3x by 2021. Had you been so savvy to avoid the five-worst years during this period (2008, 1974, 2002, 1973 and 2001), the CAGR over the period would have been 13.8%/annum, meaning your initial sum in 1950 would have increased 107.6x by 2021. Of course, unless you have a near prophetic ability to call the highs and lows, the best thing is to probably embrace strategies like dollar-cost averaging and reinvestment of dividends over long periods, rather than trying to time the market. You can redirect some modest amount of active investment activity alongside a more significant long-term buy-and-hold strategy, for example, by getting in front of sectors or stocks prior to signals that a recession is looming or before unusually large amounts of fiscal and / or monetary stimulus, and so on.

If you would like to look at equity and other asset returns, standard deviations, correlations across asset classes, and so on, you should check out Messrs. Ibbotson’s and Harrington’s “Stocks, Bonds, Bills and Inflation (SBBI), 2021 Summary Edition” here.


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