Myths & Breakthroughts

Smooth, Simple, 89-Year Charts Don’t Reflect the Reality of Real-World Lifetime Investments

Financial companies use 89-year charts to convince their clients that investing is easy and that growth is certain as long as they buy and hold for the long term. Based on the Standard and Poor's 500 index, 89-year charts boost investor confidence and reduce concern regarding risk—two elements that are critical in convincing people to invest, which is the desired end result. The problem, however, is that the 89-year chart is misleading. It omits critical data and does not take into consideration the investor's Personal Period of Return® and individual lifetime investments.

89-Year Charts: Comforting, But Misleading

An 89-year chart is a graph that tracks the stock market's value over an historical period, typically beginning in 1926. Most of these charts trace the journey of a single dollar invested over that 89-year timeframe. If invested in large company stocks, that dollar becomes $3,045 over this timeframe. Invested in small company stocks, it grows to $15,532.

This optimistic and encouraging presentation is designed to make investors consider what would happen if they invested not $1, but $1,000 dollars. Make an easy investment that requires no maintenance, wait until a few extra zeros accumulate and — poof! They're rich.

Hidden Flaw No. 1: The Chart Omits Fees

The 89-year chart tracks gross investment results, not net, so it does not account for fees. Real-world investors are likely to earn lower returns.

Hidden Flaw No. 2: Real Investors Don't Have 89 Years

Hopefully every investor will enjoy a nice, long, nine-decade life. No one, however, will invest from the day they are born until the day they die.

Research shows that most people begin investing in their late 20s or 30s. Some people might start with their very first job. Others may have to pay off student loans before they can start saving. Others may get divorced and have to start over in middle age. With the average target retirement age of 60-65 in the United States, most investors have between 20 and 42 years to invest.

This is their Personal Period of Return®, during which they must capture the most returns and make as few mistakes as possible.

Not only is 89 years an arbitrary and irrelevant time frame, but each personal period of growth takes place over a different market environment. Many investors who ended their investment journey and neared retirement in 2009 saw decades of work and savings wiped out in just two years. Those who began investing in 1894, 30 years before the Great Depression, were literally born to lose everything.

Hidden Flaw No. 3: Missing Data

Advisors may prefer the 89-year S&P 500 chart because it is pretty. It shows a smooth, steady, bottom-left to top-right climb that always grows through good and bad. A much more realistic data set is the one tracked by the Dow Jones Industrial Average, which dates to 1896.

This chart reveals a much less attractive, more volatile journey of radical growth spurts and dramatic crashes. This chart tells investors that there are two very different market environments, and one single strategy—namely, buy and hold—cannot prevail through both the times of smooth growth and the times of intense stress.

Hidden Flaw No. 4: Logarithmic Charts

Logarithmic charts, or log charts, space gains evenly over time. These charts operate on levels, with each level being 1,000 percent higher than the original. In the end, $1 going to $2 looks the same as $1 going to $100.

A radical, 57 percent loss barely registers, which intentionally can mislead investors into believing that major crashes are actually just tolerable dips. Major losses should be obvious, but log charts are another way that financial professionals may smooth things over when pitching to investors.

In order to understand the terrible damage that major crashes inflict, people must first believe that they happen. The 89-year chart intentionally paints a rosy picture that makes stock market crashes appear rare and tolerable. The smooth, consistent upward tick is designed to convince investors that they don't need a secondary strategy because buying, holding and never selling is the surest way to turn a $1,000 into a fortune.

Article tracking number 1-483481

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