The Stock Market’s Little Shop of Horrors: And You Thought the Aftermath of 1929 Was Grim

Abstract

Do stocks always beat bonds? Do stocks necessarily beat inflation by 6%–7% over long periods? Data from select foreign markets and pre-1926 U.S. markets call these shibboleths into question. Better to regard stocks as always a risky investment, independent of holding period, and regardless of immediate prior returns. Thus, buying after stocks have declined by 40% is no panacea. And, severe declines in excess of 40% are more common than with conventional asset allocation models, as the halcyon decades following the Depression might suggest.