A Lifetime of Reasons to Avoid Investing in Stocks
Markus Muhs - Jan 29, 2021
Investing in stocks is scary. Here are 40 years worth of reasons to stay away.
A little over a decade ago, when the investing public was still healing its wounds after the financial crisis, it was difficult to encourage investors new and old to give stocks another chance. I remember having a "prop" on my desk—facing the client—that included a list going back 50 or so years, listing every bad news item each year that would have prevented someone from investing their hard earned money into stocks.
That, of course, was when I was working at a bank, and the prop was a sales tool to encourage people to invest in mutual funds rather than GICs. Investing in equities for the long-term is so profoundly common sense that it shouldn't require sales tools, but sometimes we need some illustrations to just remind us of logic, rationality, and common sense.
For that reason I'm recreating a similar list here for each year that I have personally been alive, illustrating that in every one of those years there was at least one big reason not to invest, yet investing in any one of those years yielded a better long-term result than today's GIC rates.
Included is what the S&P 500 started each year off at and what the compound annual growth rate was from the beginning of that year through to December 31, 2020. In an earlier version of this post I calculated only growth in principle of the S&P 500 index, but in this latest revision I include total annualized returns, including dividends. This information was sourced from 2001-onward via Morningstar (S&P 500 Composite TR USD) and for years prior from The S&P 500 at Your Fingertips by Political Calculations.
So here we go.
The 1980s were a good decade to be fearful. Assassinations of important people seemed to be all the rage. The global economy started out the decade in pretty bad shape. The U.S. elected a sabre-rattling celebrity with questionable policies as POTUS, oh yeah and then there was that Mutually Assured Destruction thing looming over everybody.
The 1990s involved a complete reorganization of the political structure of Europe, from the fall of the Iron Curtain to the development of what would become the European Union. The decade was not bereft of a number of wars and genocides in Europe, the Middle-East, Africa.
The theme of the 2000s was kicked off by 9/11 and renewed conflicts in the middle-east that followed.
It's interesting to look at the S&P 500 values and the forward growth rates in a more long-term perspective, with the 2000s still being relatively fresh in our memories but with a decent amount of time having passed now. From the intraday high on August 24th, 2001 to the intraday low on September 21st (during which 9/11 turmoiled the markets) the S&P 500 slid from 1185 to 944. Oh, the humanity! If you were investing at that time and were panicking about 9/11 and global strife, it seems kind of ridiculous in hindsight, with the SPX now pushing toward 4000.
In the 90s we saw a bit of a dip in the go-foward returns from several of the high points. This is a reminder that—while elevated stock valuations tell us nothing about what the markets will do in the near-term—high stock valuations lead to lower long-term growth rates. Buying stocks at their sky-high valuations in 2000 didn't necessarily predicate the 3 awful years on the market that followed, but the lower 6.6% annual growth rate over the 20 years that followed was to be expected.
At the same time, entering the markets at the low points in 2003 and 2009 proved quite fortuitous. There has never been a time in history when investing new money during a time of market turmoil proved anything but opportune, so long as you invested in a diversified basket of stocks or an index fund. Seen another way, anyone who contributed regularly to their investments throughout the 2000s saw better returns on the money they invested during the gloomy periods in 2001-2002 and 2008-2009 (when I had clients asking to put their monthly investment plans on hold, or deferring new investment during RRSP season) than during the time periods when everyone was excitedly buying stocks.
If I created this exact same table with a 2012 end-date, things would look different, with most of the returns from 2000 to 2012 looking pretty discouraging (imagine: negative, over a 12-year span... screw stocks, get me a GIC!). The right-most column could very well be negative today, but the message remains the same: Stocks (or equity mutual funds/ETFs) are the only solution that will help you achieve your financial goals over the long-term.
And stocks continue to be the way into the nascent new decade. We had quite a year in 2020, including a full 35% crash during which we investors had an opportunity that only comes up 2 or 3 times per investment lifetime to buy stocks. It's a shame it passed by so quickly. Think back to March 2020, it should be fairly fresh in your memory (we're still in the pandemic as I write this): things looked really really awful—owning stocks or buying stocks was as scary as ever!
Two things are demonstrated in the above:
One is that whenever equity returns were at their worst and the geopolitcal/news headlines were at their worst, those were the best times to invest. For some reason, human inclination is to do the opposite.
- People were the most excited about investing in the markets in early 1987, and you can see that the forward return from that date was a little lower than in all the preceding years (but also, time has smoothed things out and really made Black Monday irrelevant).
- People were really excited about buying stocks in 2000, after which followed some very below-average long-term returns. These numbers were lower when I originally wrote this piece in 2017, but a few more years on the market also smoothed things out and made the returns from 2000 onward more respectable.
- In 2009 the prospect of investing in stocks seemed horrific, henceforth yielding some of the best annualized returns.
The other thing demonstrated is that the news media will ALWAYS, year in and year out, give you some reason to be fearful of the markets and life in general. It's what sells. Used to be about getting people to pick up and buy the paper by putting some horrific picture and headline on the top fold; now it's about attracting your clicks and getting social media shares. Fear sells.
Below is a chart of what the S&P 500 did, only in principle growth (excluding dividends), over those 40 years. It's a logarithmic chart, which even de-emphasizes more recent years, so you can see more of the volatility of years past (as opposed to the typical arithmetic chart which only looks like a hockey stick graph). Can you even tell, looking at this chart, that the markets are panicking again today, down over 1%?
Today, as I revise this post in early 2021 (hopefully what turns out to be the tail end of the pandemic, but we'll see) stocks are relatively expensive and there's a fair bit of widespread enthusiasm of people getting into stocks. I don't think as high as in 2000, but again we won't know until we look back at this period 10 or more years from now. Know this, however: the pandemic will have no impact on your long-term investment return. If anything, it created a fantastic opportunity to buy, last year, but if you're investing for 30+ years, consider it like investing at a market-high in early 1987 vs after a crash in early 1988; you'll see only a slight change in your long-term returns.
More likely to affect your returns are current high stock valuations, and these should also not be seen as a reason to avoid investing, as in time they will be smoothed out. Investing at close to market highs in 2000 led to a 20-year return that is still at least 3x today's risk-free interest rates. This should be an absolute no-brainer.
For the time being though, it's worth considering more conservative growth rates (ie: 6% on stocks) in your financial plans or expectations over the next 10-20 years and to be careful when investing any money you might need in fewer than 15 years (remember that the tables above include a 12 year period during which markets were flat/negative).