The Odds Or Likelihood Of Losing Money In The Stock Market Long-Term

What Are The Odds Or Likelihood Of Losing Money In The Stock Market Long-Term? (Facts, Statistics Analysis)

The majority of investors think long-term. For instance, most US households, excluding the wealthiest 1%, predominantly keep their stocks, bonds, and bills in retirement portfolios. In fact, those not in the top 1% or even 10% of wealth distribution have 60% and 77% of their investments, respectively, in defined contribution and defined benefit plans. Considering that many prioritize the future, the long-term performance of major assets is of utmost significance. What are the odds or likelihood of losing money in the stock market long-term?

Based on recent research, studies conclude that an international stock portfolio has a likelihood of losing money between 4.2 and 25.9%, depending on the time frame.

We would argue this is significantly higher than most investors would guess. After all, isn’t long-term investing a “sure thing”?

Let’s dig deeper into some very interesting research we found:

Long-Horizon Losses in Stocks, Bonds, and Bills

Long-Term Stock Market Risks

In August 2023, a study by Aizhan Anarkulova, Scott Cederburg, and Micheal O’Doherty was published with some fascinating findings. The study is called Long Horizon Losses In Stocks, Bonds, And Bills.

The study assessed the combined long-term return distributions in developed nations for domestic stocks, international stocks, bonds, and bills. These distributions consider both the historical and cross-sectional variations in returns across asset classes.

Special concentration was made on the likelihood and potential impact of enduring losses, considering their significant implications for long-term investors, pensioners, and savers.

One challenge when examining long timeframes is the limited effective sample sizes. To address this, an extensive dataset was utilized that covered approximately 2,500 years across 38 developed countries, spanning from 1890 to 2019.

Potential biases such as survivor bias and easy data bias, which can arise from focusing on final market results or readily available data, are tried to counteract because:

  1. Determine developed nations using pre-existing data.
  2. Ensure the data has no interruptions for any of the four asset categories, covering 91% of the possible sample of developed nation asset returns.
  3. Adopt an estimation method that includes data from unsuccessful markets (yes, some markets have failed completely!), even if their historical data is brief.

Can you lose money long-term in stocks?

Indeed, you can. You can even lose it all if you invest in failed countries.

Let’s summarize the findings from the report in this table to find out the odds or likelihood of losing money in the stock market long term:

Domestic stocksInternational stocksBondsBills
% Probability of loss, 1 month42.841.243.140.5
% Probability of loss, 1 year37.133.33837.9
% Probability of loss, 5 years2925.93138.2
% Probability of loss, 10 years22.318.13038.4
% Probability of loss, 20 years16.28.428.337.6
% Probability of loss, 30 years12.64.226.836.9

The table above is real returns, i.e. returns adjusted for inflation, which is the only correct way of measuring returns.

As you can see, the odds and likelihood of losing money long-term are high. Even with a time horizon of 30 years, you have a 12.6% chance of losing if you only invest in domestic stocks. However, diversification pays off against losses: the chances of a loss are reduced to 4.2% if you invest internationally.

The findings indicate a significant likelihood for various asset classes to incur losses at the same time. While the standalone loss probability for domestic stocks is 12.6%, it dramatically increases when considering a loss in other asset classes. Specifically, the probability jumps to 39.1% if international stocks face a loss, 28.8% for bonds, and 20.7% for bills. In scenarios where any asset class incurs a loss, bonds and bills are often more susceptible to losses as well.

In comparison to domestic stocks, international stocks present a reduced loss risk of 4.2%. Investments in international stocks gain from market diversification, and the tendency for real exchange rates to revert to the mean serves as a hedge against domestic inflation. This aligns with the purchasing power parity (PPP) theory.

On the other hand, bonds and bills frequently underperform against inflation, carrying real loss probabilities of 26.8% and 36.9%, respectively. During inflationary times, these assets can sometimes see significant real losses.

Such high probabilities challenge the common perception of fixed-income investments as secure, especially in terms of actual purchasing power. When comparing our findings to those inferred from monthly return rates, there are notable quantitative and qualitative discrepancies in drawing long-term conclusions based on short-term returns.

Has the stock market ever lost money in a 3, 5, or 10 year period?

Unfortunately, yes, and it’s quite likely. For example, the graph below shows rolling returns for S&P 500, including dividends, for 3, 5, and 10 years since 1993:

What Are The Odds Or Likelihood Of Losing Money In The Stock Market Long-Term?

These are nominal returns, and it will be even worse if we adjust to real returns (inflation-adjusted).

Long-term real returns of stocks

Let’s look at the expected returns from the study:

Domestic stocksInternational stocksBondsBills
1 USD real worth after 1 month1.011.0111
1 USD real worth after 1 year1.081.071.031
1 USD real worth after 5 years1.451.421.141.04
1 USD real worth after 10 years2.012.011.321.09
1 USD real worth after 20 years3.893.991.761.2
1 USD real worth after 30 years7.457.82.341.32

Over a 30-year period, both domestic and international stocks tend to have better payout distributions compared to bonds and bills. Domestic stocks average a payout of $7.45, while international stocks stand at $7.80.

In contrast, bonds average at $2.34 and bills at $1.32. Furthermore, there’s a notable probability of real losses in these broad asset class distributions, as we have covered earlier in the article.

Are stocks safe long term?

No, no investments are safe, and not stocks either. Any investment always involves the risk of loss, either temporary or permanent.

If you invest locally, you have a much higher risk of loss than if you diversify internationally. You have the risk of losing property rights and failing completely (100%), and you face the risk of high local inflation. If you invest internationally, you reduce both these risks substantially!


How long should you own or hold stocks?

The results are pretty clear: the longer, the better, and hopefully, that is no surprise for our readers.

How often does the stock market lose 20%?

According to the research paper, S&P 500 (for example) has historically crashed more than 20% every 7 years.

Why can you lose money long-term in stocks?

Poor asset returns often coincide with less favorable economic scenarios, according to the study. Yet, the major economic downturns are overshadowed by significant declines in real dividend growth that lead to substandard stock performance.

The study hints at notable fluctuations in profit margins as a portion of total production. These align with the recent documented shifts in labor and capital share in scholarly literature.

What Are The Odds Or Likelihood Of Losing Money In The Stock Market Long-Term? Conclusions and implications

First, local fixed-income markets don’t reliably offer a secure avenue for growing wealth. Inflation can rapidly negate any potential advancements achieved through investments in government bonds or bills.

This information may be concerning for those saving for retirement and other long-term investors. Experiencing real losses in primary asset categories isn’t uncommon, even over extended periods.

These long-term losses in local stocks and bonds typically arise during times of economic decline, which might not always be catastrophic. The financial stability of upcoming retirees and the long-term sustainability of pension and endowment funds face the possibility of significant market deficiencies, even without major economic disasters.

While the study paints a rather grim picture, the data also point to potential buffers for long-term savers:

Diversifying investments internationally seems to offer some relief. Encouragingly, regardless of investment strategies, a higher savings rate can bolster investor resilience against unsatisfactory returns.

The broader implications for future retirees could be twofold: while stock market losses might stem from dwindling profit margins due to a rising labor share, it could cushion the overall impact by diversifying. It’s the only Holy Grail in the markets.


What Was the Focus of the Long-Horizon Losses Study in 2023?

In August 2023, a study called “Long Horizon Losses In Stocks, Bonds, And Bills” explored the long-term return distributions in developed nations for various asset classes. The study focused on the likelihood and impact of enduring losses over extended periods.

How Does Diversification Affect the Likelihood of Losses?

Even with a 30-year horizon, there’s a chance of 12.6% for domestic stocks, emphasizing the risks involved. Diversification can significantly impact the likelihood of losses. The study shows that investing internationally reduces the chances of loss to 4.2%, highlighting the benefits of diversifying across different markets.

How Often Does the Stock Market Experience Significant Losses?

Historically, the research indicates that the S&P 500 has crashed more than 20% every seven years on average. This information provides insights into the frequency of significant market downturns. Poor asset returns, fluctuations in profit margins, and economic downturns contribute to long-term losses in stocks.

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