Can The Stock Market Be Beaten?

I don’t know, but that’s what I’m posing here today.  A hypothetical situation where we go against all advice of every financial advisor ever.  It’s the advice that says we should never guess what the stock market is going to do.

Disclaimer: I’m not recommending you do this!  This is not financial advice, rather, I’m more interested in demonstrating what would need to happen in order for you to make a correct “guess” on the ebbs and flows of the stock market.

Look at this graph that I got from Dow Jones 100 Year Historical Chart.  dow-jones-100-year-historical-chart-2015-08-10-macrotrends

The grey lines are those periods of time that were considered to be recessions, and I’ll give you a summary of when those recessions occurred:

  • 1938
  • 1945 – 19.3% drop in the Dow
  • 1949 – 19.3% drop
  • 1953 – 7.5%
  • 1957 – 14.1%
  • 1960 – 13.9%
  • 1970 – 30%
  • 1974 – 45%
  • 1980 – 16%
  • 1990 – 18%
  • 2001 – 37.8%
  • 2009 – 50%

OK, so if there hasn’t been a gap between recessions of more than 11 years at any point in the last 70, could it stand to reason that at the very latest we’re going to see another recession by 2019-2020?  What if we pulled our money out and put it in some sort of guaranteed interest (or as close as a 401K would let us) that at least broke us even during a recession?  I’ve had multiple financial advisors tell me that I should be investing for the long term, because the trend is that the stock market always goes up.  OK that’s fine, but isn’t a recession less than every 10 years back to 1940 a significant trend as well?

Here’s something that sweetens the deal even more, in my opinion.  Look how inflated this stock market is right now!  Look how much money we’re printing in the US to try to keep up with our debt!  Aren’t these signs that a dip in the market is coming?

Alright, here come the numbers:

Let’s say I have $100K in some form of 401(k), and I pull that money out of the stock market right now and throw it in to some bonds that yield, oh I don’t know, 2%.  The average return on an index fund over the past 5 years has been 12%, but if we’re truly nearing a peak in the market the growth rate will taper off.  That said, for the example I’m using, I’ll go with an 8% annual return.  So I’m giving up a potential 6% return on my money every year by doing this.  Yikes.  OK, for simplicity’s sake let’s say I don’t put any money in my 401(k) over the next 5 years – this is strictly focusing on growth, not contributions.

There are two moving parts here.  The timing of the recession, and how big the recession is going to be.  I’ll give you a combination of scenarios that focus on both variables:


Scenario 1: Recession hits in exactly 1 year

  • Market drops 10% before we decide to get back in.

Our money in exactly one year would be $102,000 instead of $108,000.  The market then drops 10%, and we decide to get back in.  Had we just stuck with the market instead of pulling our money into bonds, we would have $97,200 as opposed to the approximately $102,000 we have with bonds.

Result:  Bonds win


  • Market drops 15%

Our money in one year is still $102,000 instead of $108,000.  A 15% loss on $108,000 leaves us with $91,800 in the stock market vs $102,000 with bonds.

Result: Bonds win


  • Market drops 25%

A 25% loss on $108,000 leaves us with $81,000 vs $102,000 in bonds.

Result: Bonds win big time


Scenario 2: Recession hits in exactly 3 years

  • Market drops 10%

Our money in exactly 3 years would be $106,121 with bonds, and $125,971 with stocks.  A 10% loss would take stocks down to $113,374.

Result: Stocks win


  • Market drops 15%

A 15% loss would take stocks down to $107,075.  Bonds are at $106,121, so this means even a 15% drop would favor stocks.

Result: Stocks win, barely.  This seems to be about the breakeven point on an 8% yield.


  • Market drops 25%

A 25% loss would take stocks down to $94,478.

Result: Bonds win


Scenario 3: Recession hits in exactly 5 years.

If you guessed wrong by 5 full years, you’re getting crushed by your decision.  To begin with, your bonds would take your 401K balance to $110,408 whereas stocks would be at $146,932.  The index fund would have to fall roughly 25% for this to pay off even slightly.  And I don’t know how many people would have the discipline to let the market drop 25% before re-entering, seen as how less than half of our recessions even reached that mark to begin with.


Here’s the conclusion: unless that recession hits within a year of your exit from the stock market, it would have to be a monster recession in order for this gamble to truly pay off.  I do think a larger recession is coming soon, but do I feel confident that I can time it correctly?  Absolutely not.  So I won’t be taking the gamble.

What are your thoughts on this?  Have you ever considered doing this?  Are you considering it now?