It is amazing that I still hear the phrase, “Stocks always go up in the long term”, or something to that effect.  I even hear it from people who are otherwise rather savvy when it comes to the subject of money.

I suppose you have to define “long term”, but I would still have to quibble with this even if we are talking about decades.

In the U.S., stocks have historically gone up over time.  There is no question about this.  But even throughout the last century, there were a couple of periods where there were long downturns.

If you had bought the S&P 500 index at the top in 1929, you would have had to wait until 1954 to get back to where it was, with a lot of roller coaster action in between.

If you had bought that same index in 1968, you would have had to wait until 1979 to get back to about the same level.  But this is in nominal terms.  The 1970s saw horrendous price inflation in the double digits.  On an inflation-adjusted scale, you would have waited until the early 1990s.

But this is just the past.  As the SEC says, past performance does not necessarily predict future results.

It gets worse if you look at Japan.  The Nikkei hit almost 39,000 in 1989.  Today it is around 16,000 to 17,000.  For anyone who says that you can buy and hold stocks because they go up in the long run, have them tell that to a Japanese investor who bought shares in 1989.  It is now 27 years later and his investment is worth less than half of what he paid for it. How long is he supposed to wait?  40 years?

And let’s remember, we aren’t talking about some third-world country.  In the 1980s, many Americans thought the Japanese were going to take over the world, at least economically speaking.

I have no issue with people buying stocks, but it should be done with some understanding and realistic expectations.  If some 22 year old out of college wants to put his first $5,000 saved into the stock market, it isn’t a big deal.  Even if he loses all of it, he can easily recover.  Of course, for a 22 year old, he might be better off investing in himself with a good trade or a side business.

For someone with a substantial net worth, especially for someone who is older, I don’t think it is wise to have a large percentage in stocks.  Anything over 50% is extremely risky in my view.

This is why I advocate a permanent portfolio, or at least something that somewhat resembles it.  This is a portfolio that really will likely go up in the long run.  There are no guarantees in life, but you should at least search for things that have high probabilities.

In conclusion, stocks don’t always go up.  In a true free market, stocks probably wouldn’t go up because we would have a more stable money supply.  Stocks in general go up in price primarily because of monetary inflation.

In a true free market, people would buy stocks primarily for the dividends.  Some would go up and some would go down based on the expectations of future dividends.

But we do not live in this world now.  It is highly distorted by government and central bank policies.  Most people buy stocks for capital gains.  Still, they don’t always go up.  Just ask the Japanese.