Can past market cycles help us with future investment decisions?

The year is 1966: the Baltimore Orioles just won the World Series, the Houston Astro-Dome makes its debut, Star Trek airs its first season, and the stock market has been in a sixteen-year up trend. The American Dream is in full swing. Who would have predicted 1966 would mark the beginning of a sixteen-year slide in the market that would result in a 72% decline in REAL dollars (inflation adjusted), leaving investors to wait until the mid-1990s to gain back the same dollars they invested?

“Impossible,” spouts the financial savant, “Over the long term, the markets have always trended upward. Just buy for the long term and hold!” You’ll recognize this investor because he or she utters these words while frantically waving a chart of the stock market high in the air (see figure A). Looking at this chart, does this argument sound familiar? Figure A does, in fact, show the market denoted in US dollars trending upward over the long term (1913 to present). However, what you are looking at, published in every newspaper in the country every day, is a prevarication, a canard, a lie.


a typical stock market chart shows how US dollars would have grown over the decades since the market’s inception. However, US dollars in 1913 had a totally different value than US dollars in 2000. Simply put, your dollars had more value yesterday than your dollars have today. For example, in 1982, I bought a new car for $8,500. Adjusted for inflation, I actually paid $19,156.48 in today’s dollars for that car an amount that reflects the same purchasing power of $8,500 in 1982.

To drive the point home, let’s assume you bought a home in 1966 for $100,000 and sold the home today for $400,000. At first glance you’d think you made a $300,000 gain. You do have $300,000 more dollars than you spent on your original investment in 1966, however, $100,000 in 1966 dollars adjusts in inflation value to $650,852.38 in today’s dollars (the equation to calculate value changes and the relationship between historical and current day dollars is: historical price times current CPI/ historical CPI).

Essentially in real purchasing power, which is the actual worth of your money or what it will buy, you need over $650,852.38 today to buy what $100,000 would’ve garnered you in 1966. When you see the startling contrast due solely to inflation on the value of our money and what it can buy for us, it becomes apparent why we need to make adjustments in our calculations of investment performance over the years in the stock market. We MUST set the value of the dollar equal on both sides of the infamous up-trending Wall Street chart.
This chart looks markedly different than Figure A. What our excitable, chart-wielding investor will quickly see, the maxim that, “over the long term, the markets have always trended upward, buy for the long term and hold,” is a gross misstatement of the facts. The accurate stock market chart (Figure B) shows prolonged periods of up trends and prolonged periods of down trends. A closer look at this chart also reveals that around every 161/2 years or so, the market reverses trends. (1950 to 1966, 1966 to 1982, 1982 to 2000.) What is quite interesting is that if this pattern continues, based on historical data, we can see that we are currently in the most recent 161/2 year down trend, we’re eight years in, actually. Therefore, we could surmise that we will live through what could be called a secular bear trend with mini bull periods sprinkled throughout for the next 8 years or so. In other words, contrary to the normal spin, the market is arguably going DOWN in the long term, and up in the short term.

Based on this evidence, do you take your money out of the market for the next 8 years? The answer is no—this chart represents just the Dow Jones Industrial Average, A well diversifies balanced portfolio with non-correlated positions will hold value as the Dow does not. As a portfolio manager I must take this information into account when optimizing my portfolios, as any investor should be taking in all the information available before making allocation decisions. These charts reflect perhaps the biggest lie of Wall Street and one of the most intricate myths it propagates—buy and hold only works in up trends, and the actual value of our dollars across time must be calculated in order to see if we’re keeping up with inflation and the lifestyles we wish to support.
If an investor bought the market in 1966, by 1982 you would have lost 72% of your buying power  and it would have taken you until 1998 to breakeven. That’s a lot of buying, hoping and holding.

Dominick Paoloni is the portfolio manager and CEO of Investment Protection Service, a wealth management firm, and is a Registered Investment Advisor. His fee-based financial planning firm is located in Lakewood, CO. He has been in the financial services industry for over 25 years and invites questions and comments from readers: or 303-697-3174.

*This article is not a recommendation to buy or sell and should not be considered investment advice. Please consult IPS or another financial advisor before making any investment decisions.