Ups and Downs

This is the kind of thing that used to get me all excited and I would blog about it:


First, generally speaking, this is a great chart!  Very intersting to see the ups and downs of the stock market.  It looks so great!  Mostly up!

What bugs me is that the upper axis and the lower axis are (1) not the same, and (2) even if they were they would be misleading. Why?  Because a 50% drop in the stock market wipes out half of your savings whereas with a 50% increase in the stock market you end up with 33% more money!  The road down is much worse than the road up.  (Actually, I think the upper and lower axis are the same, in that they are log(10), but that just makes the problem worse, me thinks.)

(They mention this a little bit in the article while making the point that while the "most you can lose is 100% of your money" the upside is "unlimited"!)

Losing 100% of your money is a really, really bad thing, especially if you have been a good citizen and saved up for retirement over 20 or 30 or 40 working years.

BTW, if you talk to a financial adviser, they will tell you that even if you had bought stock at the high before the great depression, in the long run (admittedly, the very long run) you would have come out ahead.  Stocks always go up!  Always!  [Not really.]  They will convince you of the truth of this by pointing at the Dow Jones Industrial Average or the S&P 500.  But there-in is a great lie:  those indexes are constantly modified.  If you had actually bought real stocks (matching the DJIA) at the height of the 1929 stock bubble you would have had many stocks whose value went to zero.  ZERO!  But no worries for the DJIA people:  they just remove those stocks and add in better ones.  And also there is the DJIA Divisor which adjusts the entire index!  

Which also makes a lie out of the statement that an index fund is not managed.  It has to be!  At least a little bit, since the index changes!

(Investing in an index fund might still a great idea for you [who knows - this is not investment advice]- but it's good to know what is going on under the covers!)


Here's another one of these classic charts that makes it look like things go up! up! up!

(Also from BusinessInsider)

You get the feeling that sure, the stock market drops sometimes, but look, it always goes back up!

But if you put the actual numbers into a spreadsheet, here is what you find (and BTW, congrats to you if you really have $100,000 in the stock market):

Looks good now!  But it took over four years to get back to "break even".  If you needed the money during that time, you're screwed!