What's the first thing that comes to your mind when you hear someone mention the stock
market?
Is it bad news?
A market collapse?
A huge opportunity for investors to make money?
A roulette wheel?
Or does the image of some boring dude on television talking in a monotone voice over a bunch of
numbers come to your mind?
Well, I've been thinking, especially in the wake of all this trade war news, that it would
be a good idea to once again go back and look at the history of the stock market.
Today I'm going to try and lessen some concerns some of you may have when it comes to investing
in the stock market.
It's not very lucrative, at least in comparison to fear-inducing headlines that get people
to click in record numbers, but it can be very helpful.
That's especially true for those who are new to the investing world.
So, how risky is the stock market really?
So let's talk about something that's probably on the minds of many new investors right now
when it comes to the stock market and that is risk.
Some have said that playing the stock market is essentially like gambling.
But is that true?
How likely is it for you to make money investing?
And how much risk does that potential carry?
We're going to find that out by going through the history of the stock market.
We'll look at the performance of the S&P 500, Dow Jones industrial average, and NASDAQ composite
to figure out how often the market is up and how often it's down.
Let's get started.
For the S&P 500, we're going to go all the way back to 1928.
In 1928 the S&P 500 was valued at just about $17 a share.
Over the next 90 plus years, it would grow from $17 that year to upwards of $3,000 a
share.
That's around a hundred and seventy times its 1928 value.
However, like all of the indexes we’ll be looking at today the S&P 500 has had its fair
share of ups and downs.
It's most notable crash came right near the beginning of this time frame.
The 1920s were a great time for the markets.
there's a reason they're referred to as the roaring twenties after all.
It seemed as if investors could do no wrong.
However, that would not last.
The S&P 500 would reach a then all-time high of $31.71 in August of 1929 before starting
a slow but significant decline over the following years.
By the time the S&P 500 had finally bottomed out it was worth a mere $4.43 a share.
That's roughly 70% below its all-time high set just a few years prior.
That on its own would have been enough to make it one of the most noteworthy crashes
in the history of the stock market.
But that wasn't all.
The great depression lasted for what seemed like a lifetime.
It would continue throughout the rest of the thirties and forties.
It finally set a new all-time high of $34.24 a share in September of 1954.
The great depression as measured from the peak of the market to the bottom of the market
and back to a new peak lasted over 25 years!
Thankfully the S&P 500 has not experienced anything even close to that bad ever since.
We've also put in place quite a few measures to make sure that doesn't happen again.
While we have experienced crashes most notably in the mid-1970s and the 2000s none have lasted
even a decade.
And there's another comforting thing to keep in mind when looking at the history of the
S&P 500.
Despite the great depression, the Dot-Com bubble and the housing crisis the market has
from just about every measurement still been a good bet.
From January of 1928 to the end of July 2019 (which is the most recent completed month
I have available to me at the time of this recording) the S&P 500 has had a little over
90 years of history to look at.
During that time you can create almost 1,100 one year stretches and analyze them.
you can create over a thousand five years stretches during that time frame.
and nearly as many 10 and 20 year stretches.
So that's what I did to try and figure out whether or not the S&P 500 is risky.
Of those nearly 1,100 possible one-year stretches the S&P 500 has been positive 68% of the time.
Of all the possible five-year stretch has the S&P 500 has been positive 78% of the time.
When looking at the 10-year stretches we see the S&P 500 has a grown in 87% of them.
And finally when looking at all possible 20-year stretches from 1928 to 2019 we see is the
S&P 500 has been a net positive investment in over 95% of the scenarios.
What that means is historically speaking anyway you have roughly a two out of three chance
to make money investing in the S&P 500 if you plan to invest for one year.
You have merely an eight out of ten chance to make money investing in the S&P 500 if
you plan to invest for 5 years.
Your chances of making money continue to improve as the time you spend in the market increases.
This is a pattern we will see play out in both of the other indexes.
However, there's one thing that I did want to take a look at before moving on to the
Dow Jones industrial average.
I wanted to take a moment to look at a more modern view of the stock market.
Because much of the time spans that fail to make investors money happened during that
great depression.
So what would the numbers look like if we started looking after the end of the great
depression?
As it turns out they're modestly better.
The S&P 500 since 1950 has made investors money in 74% of all one year time frames.
It's made investors money in 84% of all 5-year time frames.
It is succeeded in increasing your net worth in 93% of all 10-year time frames.
And in 99% of all 20-year time frames, it has grown.
The story of the Dow Jones is almost identical to the S&P 500 so I won't spend too much time
on it.
Like the S&P 500, it had a very good second half of the 1920s before falling into the
great depression for about 25 years.
It had a major crash in the mid-1970s and took a little bit longer to recover then did
the S&P but still was back up and running in the early 1980s.
All would be going according to plan until the Dot-Com bubble burst in the early 2000s
which was followed shortly thereafter by the housing crisis.
This caused what is sometimes referred to as the lost decade by experts.
But just like the S&P 500 did the dow recovered in the 2010s which is the bull market we've
been riding ever since.
It should come as no surprise then that the frequency with which you make money investing
in the Dow is very similar to what we saw in the S&P 500.
However, I was able to get data from the Dow a little bit further back than I was for the
S&P 500.
So these numbers are based on data that I was able to find from January 1915 to July
2019.
Dow Jones made money for investors and 68% of all one-year scenarios.
It was positive and 78% of all five years scenarios and 85% of all 10 years scenarios.
Finally, since 1915 the Dow Jones has been a net positive investment for us in 96% of
all cases.
We see the percentages and prove if we look at a more modern view of things starting from
1950.
Using that time frame the Dow is positive and 72% of all one-year scenarios.
It grew in 83% of all 5 years in scenarios.
It made money in 91% of all 10-year scenarios.
And same as the S&P 500 it was a net positive in 99% of all 20 years scenarios.
The history of the NASDAQ is admittedly quite a bit shorter than its contemporaries.
Just wait that it has had its fair share of excitement.
The NASDAQ composite began in February of 1971.
It was trading at a little over $100 a share at the time.
And I'm like what we saw with the Dow Jones the NASDAQ was pretty volatile in its first
decade.
Within the first two years, it had gained 30% of its original value.
That was when it set a new record high of $133.73 per share.
However a little over a year and a half after that it had lost 60% of its value.
The NASDAQ in September 1974 was trading for just $55.67 per share.
the crash of the 1970s for the NASDAQ lasted roughly five and a half years before it set
a new all-time high of $135.01 per share in August 1978.
The NASDAQ, by and large, performed similarly to its contemporaries in the 1980s.
It experienced some volatility in the early part of the decade but largely trended upward.
As you might expect with a lot of tech stocks in it the 1990s were a boom period for the
NASDAQ.
As a matter of fact, it never went more than 13 months without setting a new all-time high.
By the time the NASDAQ reached its peak before the Dot-Com bubble burst it was trading at
nearly $4,700 a share.
That was in February of 2000.
Less than 30 years from the Nasdaq's inception it was trading at nearly 47 times its original
value.
Take a moment to think about that.
That's some impressive growth for a long stretch of time.
But the Nasdaq's toughest days were about to come.
When the.com bubble burst the NASDAQ was hit hard.
Over the span of two and a half years, the NASDAQ went from trading at $4,696.69 in February
2000 to trading at $1,172.06 in September 2002.
In the span of two and a half years, the NASDAQ lost 75% of its value.
You want to talk about volatility.
The NASDAQ seemed to have that in spades.
And unlike the S&P 500 which did recover slightly before the housing crisis hit the NASDAQ failed
to regain its previous high before the second crash of the decade hit.
When all was said and done the NASDAQ didn't set a new high until November 2014.
That's not quite as bad as the great depression but it was pretty tough.
However similar to the S&P 500 and Dow Jones the NASDAQ since 2014 has been on a rapid
rise.
As of July 2019, it was trading at nearly $8,200 a share.
However, despite all of that volatility, I am happy to admit that all of the three indexes
the NASDAQ has the highest success rates when it comes to making money.
Although you do have to take into account that it hasn't been around for quite as long
it's still an impressive feat.
Since its inception in 1971, the NASDAQ has made money in 76% of all one-year scenarios.
It is made money in 86% of all five year stretches.
It has had a positive return in 94% of all 10-year time spans.
And perhaps most impressively, despite all the volatility, it has yet to lose money in
any 20-year time span.
Now that is impressive.
While the past does not necessarily predict future returns I would feel pretty darn good
about the stock market based on the data we have if I were just getting started investing
in my forties or early 50s.
I would feel really good about the whole thing if I were investing even younger than that.
It does seem that as long as we are in it for the long haul investing in the stock market
is almost always a good bet.
That doesn't necessarily mean that we won't experience a market correction at some point
in the future.
As I've said before and as all continue to say until the day I die I honestly have no
idea.
Nobody really does.
But based on the data that we have we can be reasonably certain that growth is in our
long-term future.