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Should We Trust the Stock Markets to Always Go Up?

Should We Trust the Stock Markets to Always Go Up?
SpaceX rocket launch from Cape Canaveral / Credits : SpaceX

Two of the most widely accepted principles of Personal Finance are pretty simple and are actually the foundation of most of the advices to live a rich life. You know them very well. But are they reliable?

But before we get there, let me tell you about a cartesian moment I had this week-end. Blame it on Houston heat, it feels like summer is here already, but during my post-breakfast self-reflection (ie. digestion), I had a doubt. Not as deep as doubting my own existence, but still.

My doubt: How much of the principles of Personal Finance should we accept, without challenging them?

I mean, experts have told us that there was no proof that cigarettes are related to lung cancers. Another type of experts told us that the housing market could never drop by 20%. Some cinematographic experts also claimed the last James Bond was the best movie of the franchise.

So, yeah, experts can be wrong too…

The Long Term View

These days, there are really 2 main principles in Personal Finance that govern much of the decisions we make.

Warren Buffett bet 1M$ that low cost index funds will beat hedge funds. He’s crushing them.

First, since you can’t beat the market, the smartest investment is tracking the market, at the lowest cost possible. If you can’t beat it, follow it, as close as possible. Jack Bogle and Warren Buffett have been the most prominent defenders of the idea, which explains the success of low cost indexing like Vanguard. It also explains why Warren Buffett is betting 1M$ that a low cost index fund tracking the S&P500 will beat a selection of hedge funds. So far, he’s crushing them. Mathematically, that makes so much sense, I can’t argue with that one.

(For more information on this bet, watch the Berkshire Hathaway shareholder Live Stream meeting and skip to 2:42:20)

The second, maybe less intuitive, but definitely more important, is that markets always go up in the long run. This is hugely important because it means that regardless of the amount of pain required to save up and invest today, we can trust that the future returns will be worth it. If that wasn’t true, the whole idea of investing falls apart.

In a way it makes a lot of sense.

As long as people consume stuff, as long as productivity increases, as long as we live longer, as long as the global population keeps growing and we all live in a market economy, there will be an ever growing market of people to buy stuff. Easy.

Does that mean we’ll all be golden if we keep our money invested for 30 years? Is 30 years long enough to guarantee large profits to fund my awesome retirement lifestyle? 20 years? 10 years?

How long is “in the long run”?

Up, Up and Sideways

One group of folks that would have felt really hurt with this premise are Japanese investors. As if this was a coincidence, this week is a perfect example.

On May 2nd 2016, the Japanese’s stock market index Nikkei closed at 16 147 points. It more than doubled in the recent years and it is now cooling down a little. But 30 years ago, on May 1st 1986, the same index closed at … 16 739, or 600 points higher.

Yes, that’s right. The Japanese equities market closed 3.5% below its level of 30 years ago. Look at that chart:

Nikkei May 1986 - May 2016
Nikkei May 1986 – May 2016


I really feel bad for the Japanese investors who invested in the stock market to prepare for their retirement. They surely had no idea the stock market would go sideways for 30 years, but after so many years of staying invested, it would have been reasonable to expect more than a 3.5% decrease.

Japan might be the most extreme case, but it isn’t the only one.

Take the UK’s FTSE index for example. Like most indices, it enjoyed a very successful 80s, 90s and peaked in 2000. The index is today at its 1999 level and has gone mostly sideways for the last 17 years.

FTSE Feb 1999 - May 2016
FTSE Feb 1999 – May 2016

The same applies to the French’s CAC40 market and the German’s DAX (even though for the DAX, you need to look at the price returns version of the index, since the DAX is a Total Returns index).

The US Stock Market isn’t exempt from these droughts either. The returns since 2000 aren’t exactly stellar. Another example, in the 14 years between Nov 1968 and July 1982, the S&P500 progressed just 1%.

A recent study from The Economist summarizes it well:

As of February 2013, the longest period of negative real returns from US equities was 16 years. But it was 19 years for global equities (and 37 for world ex-US), 22 for Britain, 51 for Japan, 55 for Germany and 66 for France. Such periods are much longer than most small investors would have the patience to wait.

Key Take Aways

While it seems true that the stock market always goes up, in the long run, I think it’s important to realize how long that can be and add some caveats:

  1. Trusting that the market always goes up means accepting loooong periods of flat returns. Somewhere between 16-19 years for an internationally diversified portfolio, potentially much more for individual countries / markets. Ideally the prolonged period of low returns would be at the beginning of your investment journey. If you have a long time horizon of 20+ years, this should be less of an issue.
  2. Historically, the US stock market has performed better than international markets. But it could very well underperform in the future. Someone said that the only sure thing in finance is that ‘things tend to revert to the mean’. When an industry outperforms others, it tends to under perform later on. Diversifying a portfolio internationally with non-US stocks (developed countries, emerging countries) would help hedge bets.
  3. If you plan to retire on the 4% withdrawal rate, have plenty of buffer. If the stock market remains flat for 10 years instead of growing at 7-8% a year, the withdrawals would eat out the portfolio a lot quicker than planned. Who wants to go back to work once they are retired? Have plenty of buffer in your portfolio and have a backup plan.
  4. Diversify your asset classes. Stocks might be part of the portfolio, but other assets like bonds and real-estate could help smoothen the ride if the stock market were to go sideways for a prolonged period. Review your asset allocation and understand how much weight is placed on certain classes.
  5. Rebalance your portfolio. Stocks can be flat but other asset classes might not be. Since 2000, both stocks and bonds have evolved in different directions and this volatility can generate great returns with portfolio rebalancing. A regular portfolio review (eg. every 6 months) when your asset allocation is off (eg. +/- 5%) helps buying low and selling high, whichever asset is cheap/expensive. Thanks to our reader John for suggesting this!

It is tempting to see the last 16 years in the US market as a sort of stagnation, opening up to a bull rally as it’s done in previous periods. I personally don’t relate to this possibility and I think the market is more likely to correct. I however remain invested long term, especially with my oil & gas stocks, but I wouldn’t be surprised if the next few years aren’t returning much.

What about you?

  • Are you invested in the long term and Why?
  • Have you gone through a recession while you already had a large portfolio invested? How did that go?


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  1. Our investments are for the long term. We kinda belief that in the long run, the market goes up. It brings perspective to see that it can go flat for a long long time… Ouch indeed.
    That being said, the fact that we are in build up phase means we buy each month. Thus also at the super low levels… I do believe this is a good mitigation for that risk. Next to that, there are always the dividends.

    Your post makes me think that I might need to look a little better at DGI to have a sort of buffer for flat stock markets.

    • Building up wealth in a flat market is probably the best option, you’ll have much to benefit from when it goes up again!
      I agree with you that if market returns go nowhere when you are in your retirement phase, a separate income like dividends might be useful. Even if in the meantime, I clearly prefer stocks that re-invest their capital in their own business instead of distributing dividends (eg. BRK), for a longer term growth.

  2. I am a long term, low cost index fund investor. I “retired” at 49 earlier this year, so I hope my trust is well placed! Over the long haul, the market has provided nice returns, at least in the past. No one can be sure that the future will have the same result, but no investment strategy is guaranteed in an unknowable future.

    Re-balancing regularly can produce growth over flat decades. The 2000’s are often referred to as a “lost decade” but it wasn’t for us. We re-balanced often and took advantage of the peaks and dips.

    Great post!


    • Congratulations on the early retirement!
      Rebalancing can indeed be a good strategy, especially when there’s volatility between different asset classes. How did you implement this to benefit from the market since 2000? Did you have some sort of rebalancing trigger when you saw changes of +/- 5% every 6 months between stocks and bonds allocation?

  3. This is info everyone needs to see and digest — so helpful! (This is top-notch blogging — I really think you’d see some explosive audience growth with this kind of writing if you focus more on promoting your work through social media and by actively commenting on influential blogs. A post like this should have 100 comments!) 🙂

    We tend to be in the more WOP WOP camp of investors who don’t expect the gangbusters returns to continue forever. How could they?? In addition to everything you showed, climate change isn’t priced into the markets, and that’s going to have catastrophic effects around the world. Plus, without having massive population growth, we simply can’t sustain massive returns. So we plan around smaller growth, like 3% plus inflation at most. If we’re wrong, then great. But at least we have a better chance of our portfolio lasting over the long haul compared to banking on 8, 9, 10 percent returns.

    • Thanks for the nice words ONL and the vote of confidence! I think I need to take the ‘promotion and marketing’ training from experts like you!

      Your analysis on climate change is very true. There are so many things that aren’t factored in prices today like pollution, impact on health and sustainability that we’re effectively asking our future generations to foot the bill. However on the long term, companies should be able to generate higher returns without population growth is there is a dramatic increase in efficiencies. Like another industrial revolution. Maybe the “AI revolution”. How much more efficient could companies be if every employee could delegate routine tasks to a virtual assistant?

      In the meantime, I agree with you : plan for less and if you get more, pocket the difference!

  4. Well, I think this is a good post of why need to talk about investing for the long-term. I am a huge believer in secular bull and bear markets, something which I have written about on my own blog. In terms of long-term I always use the 20 year term. You can pick any spot at any time and go out over 20 year period and the market has always made money long-term. But one of the things that I have never really seen in the pf blogosphere is a discussion of secular bull and bear markets and how best to invest for them. I think there are different strategies. My guess right now is that we are either at the very end of a secular bear (typically 16-18 years) and at the beginning of a secular bull (16-18 years) or we are in the 3rd or 4th inning of a secular bull. Either way the next 10 years should be good for stock earnings in the U.S. After that….we will probably get a commodities cycle again.

    • Hi Jason – this is an interesting perspective, would you please share the link to your blog post on the subject?
      My perspective is that the next 10 years are likely to generate very low returns, I’d love to get your perspective on that post a few months ago.
      Valuations are currently stretched and both companies and governments are basically using debt as cheap leverage in the expectation that future returns will be similar to past returns, instead of investing in R&D, infrastructure or more adapted policies that will actually generate efficiencies.

  5. Pretty new to those stuff, but it is good to understand that “stock market always go up” is not that exact… thanks for investing the time to write and collect the examples!

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