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“The riskiness of an investment is not measured by beta but rather by the probability—the reasoned probability—of that investment causing its owner a loss of purchasing-power over his contemplated holding period. Assets can fluctuate greatly in price and not be risky as long as they are reasonably certain to deliver increased purchasing power over their holding period. And a non-fluctuating asset can be laden with risk.” — Warren Buffett, in his 2011 Berkshire Hathaway shareholder letter.
In the last post we looked at the US market over the last 65 years. That should cover the investment experience of everybody here unless Buffett is lurking. He’s 95 and purchased six shares of Cities Service Preferred at $38⅛ each shortly after he turned 11 (ca. 1942). That’s almost $4,200 in today’s dollars. Half of that was for himself, the other half for his sister Doris.
Now we’re going to look at the entire dataset back to 1871 courtesy of Robert Shiller. The effect of inflation and deflation on returns is astounding. The distinct upward pivot after WWII suddenly dissolves into a very soft knee. Post-war gains from productivity-driven earnings may have become the fuel of entrepreneurs and investors, but in real terms there was no fire, only a slow burn.
As in Part I, regions where real returns flatlined are shaded. Market history doesn’t repeat, but it harmonizes exceedingly well. Don’t be fooled into that “lost decade” stuff—if you stayed invested, you maintained real wealth. The stock market remains the real investor’s best friend.
There are so many cool things to point out about that plot, but I’m just going to add one. I’ve been talking about those table tops, but what about the fun parts? The real upward slopes? They are very limited in time—and if you’re out of the market or poorly diversified, you’re paying for the meal without eating it.
The following is a sobering 37-year study on this issue. Tune out the naysayers—choose an asset allocation appropriate for you and stick to it until something in your life, not the market, warrants reallocation. The prophets of doom are poison to your profits.
In summary, illusions are for artists and salesmen; reality is for investors. Good investing is boring. Focus on inflation-adjusted returns. Fiat currency is a moving target, the gold standard isn’t gold—it’s purchasing power. And with that power, buy contentment.
“Contentment makes poor men rich; discontent makes rich men poor.” — Benjamin Franklin
(Graphs are high-resolution and should be viewed full screen. You can download them.)
Is there a chart that depicts performance if you missed the *worst* 5, 10, 30, 50 days? I ask only as a curiosity, not to refute anything in this interesting article series. I’m an avid HD reader and firm believer in “time in the market” vs. “timing the market.”
Yes! Grok AI helped me find it, this is the first time I’ve thought about it. It would require time travel or a prophetic gift to apply this, whereas you can be a dummy like me and avoid missing the best days. If I only had next week’s stock prices I could beat Elon to Mars! : )
This article looks at both sides, missing the best and worst.
It ignores real returns as usual.
Thanks for providing. Agree, the tweaking and trimming method described could require a crystal ball to be consistently successful ;).
Very interesting data; thanks! I was surprised at how much of the overall timeline is shaded (ie. flat real returns).
So true. I got out of school in ’86 and got into the market and started thinking “this is too easy”. Little did I know that 1995-2000 wasn’t normal, it was going to be the best 5 years in its history and then there was a curfew going into effect. The totality of my knowledge can now be condensed into “it’s not that easy”.
I had relatives who knew nothing, were investing in stocks and were making money “hand over fist”. they would exclaim “it doesn’t matter what i do, it all makes money”. That ended very badly for them. Ditto in 2006 when they were piling into bank stocks. One retired couple lost their home. Ditto in 2021. “They can be taught, but that doesn’t mean that they will change behavior.””
So true. Everyone’s a genius during a raging bull market. I hate to say it but I’ve succumbed to those thoughts in my early years of investing. These days, I question more and more of what I think I know. 🙂
I am a 71 yr. old HD reader for less than one year. This is my first comment. The Missing Days chart finally gave me the courage to ask my question to this wonderful group of people. Straight to the point, My tax deferred retirement funds have been in fixed cash/equivalent accounts since before the April 8, 2025 market drop. I want to fix my allocation to 30/70. I can buy the 30% equities (in my Vanguard tax deferred account) at any time. Still, everything I’ve now seen tells me not to buy stocks at this high valuation time. I want to wait for a drop in stock prices. One last fact, I have a pension and SS that covers all of our expenses. I don’t need to take withdrawals until RMD’s. Should I hold off on my stock mutual fund purchase or jump in at this high valuation?
There is no one-size-fits-all answer to your question.
My opinion is that the end-game with all this stuff is peace and contentment as much as it is provision. Since your expenses are covered, it seems like the best thing to do is to stay the course until you find the same level of peace venturing into a low-cost market index fund or two. Even then, my Dad’s advice echoes in my head every time I buy stocks – “son, don’t put any money into the stock market that you can’t say goodbye to.” My Dad was an aggressive stock investor from the early 60’s until his death in 2018.
In your case, saying goodbye to the money may involve investing for your heirs, which is great fun – to me it feels like adding another 30 years to my lifespan and investing like I was young again.
Take your time learning and enjoy the journey. This website’s Guide is the best and most enjoyable introduction I’m aware of on the Internet.
Well said. The comprehensive Guide has the answer to our fear of stock market drops, in the subsection of Human > Investing Better
“We should keep in mind that, while a rising stock market may make us richer today, a falling market will likely leave us wealthier in the long run. To take advantage of tumbling share prices, we should rebalance our portfolios…”
I just commented on a different article about how I am not a fan of voting on this site. But I wanted to second your advice to “Take your time learning and enjoy the journey”. Now that is good advice indeed!