“Half the lies they tell about me aren’t true.” – Yogi Berra

We talk with people and read articles and books every day about investing, and are constantly shocked at how little most people know about the real risks and returns of the stock markets. The bear market of 2008 has only made the misconceptions worse.

This is a critical topic because inaccurate perceptions tend to lead to inappropriate actions with your investments. You may fear things you don’t need to fear and you may not be cautious about things you do need to fear.

Is your investment strategy and outlook based on inaccurate perceptions?

The main reasons for these misconceptions are:

  1. Many people view life emotionally, which results in an exaggerated view of both the risks and the returns.
  2. A great many news stories, articles, web sites and books quote stock market returns based on the raw index, which excludes dividends, instead of the total return index.
  3. News articles, of course, present exaggerated views.

Do you have a clear idea of how risky the stock market is? What is normal volatility, what worst-case scenarios are likely to happen, and what returns are reasonable to expect long term?

A list of questions is a good way for you to measure how accurate your perceptions are. These questions were chosen to highlight some of the most common misconceptions and stock market myths.

The source for each answer is shown and you could look them up, but you will be able to measure your perceptions if you just answer them directly in 5 or 10 minutes.

Many of the answers came from our own research. We took the calendar returns of the S&P500 in U.S. dollars since 1871 and analyzed them. The S&P500 is the broadest index with documented returns since the 1800s. Note that using monthly or daily data would show somewhat more extreme results.

The period during the Great Depression dominates all the extreme stats. It is questionable whether that level of volatility could happen again, since the government did not know how to manage an economy back then. They made it far worse after the initial crash by raising taxes and interest rates, and not standing behind bank deposits. So, we will present relevant stats with and without that period. To be fair, we will exclude the recovery period as well as the crash.

Here is a list of questions to test your view of stock market risk and return. If you score:

  • 10-12 You have an excellent grasp of markets.
  • 7-9 You have a moderate understanding.
  • 0-6 You need to get educated.

1. Short term risk

What is the worst calendar year loss? 1

Including 1930s  Excluding 1930s

  1. -44%    -37%
  2. -54%    -47%
  3. -64%    -52%
  4. -74%    -57%

2. Worst-case scenario risk

What is the worst total multi-year loss from top to bottom (calendar years)? 1

Including 1930s  Excluding 1930s

  1. -63%    -38%
  2. -73%    -48%
  3. -83%    -53%
  4. -89%    -63%

3. Making nothing for decades

What is the longest period of time without a gain (calendar years)? 1

Including 1930s  Excluding 1930s

  1. 14 years  10 years
  2. 19 years  14 years
  3. 22 years  16 years
  4. 26 years  22 years

4. Secular bear markets

Many articles have been written about long periods of time when the markets make virtually nothing. What are the actual returns per year for the last 2 secular bear markets?1

1929-49  1966-82

  1. -0.3%   -0.1%
  2. 0.2%   0.7%
  3. 1.5%   3.2%
  4. 3.7%   6.7%

5. Recovery from a loss

From the bottom of a bear market, what is the longest period of time until the entire loss was recovered (calendar years)? 1

Including 1930s  Excluding 1930s

  1. 10 years  4 years
  2. 15 years  10 years
  3. 18 years  13 years
  4. 22 years   18 years

6. Worst-case long term returns

What is the worst 20-year return per year? 1

Including 1930s  Excluding 1930s

  1. -9.8%    -4.7%
  2. -5.4%    -1.3%
  3. -2.6%    +0.5%
  4. +3.1%    +5.0%

7. Bear Markets

A bear market is generally defined as a loss from top to bottom of 20% or more. Since 1950, how many bear markets have there been? 3
Canada (TSX) U.S. (S&P)

  1. 5  7
  2. 9  5
  3. 13  13
  4. 17  15

8. Recent returns by asset class

Looking at recent returns for the last 30 years from 1978-2008, which is the correct order of returns from highest to lowest? (Real estate figures from Toronto Real estate Board) 4&5

  1. Gold, Canadian stocks, Real estate, US stocks, GICs
  2. Real estate, Canadian stocks, US stocks, Gold, GICs
  3. US stocks, Canadian stocks, Real estate, Gold, GICs
  4. US stocks, Canadian stocks, GICs, Real estate, Gold

9. Growth of $100 since 1950

The investing time horizon for the average person is about 60 years (approx. age 25-85). Conventional wisdom advises us to allocate our investments between stocks, bonds and cash (T-bills). What would $100 invested in 1950 have grown to invested in each asset class (to the nearest thousand)? 3

  1. Cash $3,000, Bonds $8,000, GICs $8,000, Global stocks $11,000, Canadian stocks $12,000
  2. Cash, 3,000, GICs $8,000, Bonds $11,000, Canadian stocks $22,000, Global stocks $30,000
  3. Cash $3,000, GICs $6,000, Bonds $7,000, Canadian stocks $30,000 , Global stocks $49,000
  4. Cash $3,000, GICs $5,000, Bonds $6,000, Global stocks $76,000, Canadian stocks $105,000

10. Keeping up with Inflation – Consistency of returns

How predictable are long term returns? The real return of stocks (after inflation) since 1802 is 6.8%. How do the after inflation returns compare by market era (1802-71, 1872-1925, 1926-2006)? 2

  1. 7.0%, 6.6%, 6.8%
  2. 5.1%, 6.3%, 9.0%
  3. 10.0%, 4.8%, 5.6%
  4. 3.6%, 5.6%, 11.2%

11. Keeping up with inflation – Worst case scenario

Inflation is the enemy of the long term investor. What are the after-inflation returns per year for the worst 10-year period since 1802? 2

  1. Stocks -4.1%, Bonds -5.4%, T-Bills -5.1%
  2. Stocks -11.0%, Bonds -10.1%, T-Bills -8.2%
  3. Stocks -15.2%, Bonds -3.4%, T-Bills -1.1%
  4. Stocks -31.6%, Bonds -15.9%, T-Bills -15.1%

12. Keeping up with inflation – Medium term risk

What is the correct order of risk over 20-year periods (based on the standard deviation of after-inflation returns since 1802) from lowest to highest risk? 2

  1. T-Bills, Bonds, Stocks
  2. Bonds, T-Bills, Stocks
  3. T-Bills, Stocks, Bonds
  4. Stocks, T-Bills, Bonds

Below are the answers. How did you do?

We would like to have an informal poll, so we would appreciate it if you would tell us your score, and possibly in which area your perceptions were wrong (if you are not too embarrassed). If your score was low, you are not alone. An article to follow shortly will provide explanations.

1. A 2.A 3. A 4. D 5. A 6. D 7.B 8. D 9. C 10.A 11.A 12.D 

1 Our own research by analyzing the calendar total returns of the S&P500 in US dollars since 1871.
2 Classic book “Stocks for the Long Run” by Prof. Jeremy Siegel that has data from 1802-2006.
3 Morningstar as shown in Andex Charts.
4 Morningstar.
5 Toronto Real Estate Board.

Ed Rempel is a Certified Financial Planner (CFP) and Certified Management Accountant (CMA) who built his practice by providing his clients solid, comprehensive financial plans and personal coaching.  If you would like to contact Ed, you can leave a comment in this post, or visit his website EdRempel.com.  You can read his other articles here.


  1. FrugalTrader on January 21, 2010 at 10:10 am

    Great article Ed. I just did the test and I got 9/12, but a lot of them were lucky guesses. :)

  2. Michael James on January 21, 2010 at 10:33 am

    Very interesting quiz. Too often we see statistics that ignore stock dividends. The answers look completely different when dividends are (improperly) ignored.

  3. Canadian Couch Potato on January 21, 2010 at 11:56 am

    Very interesting article. Just one question: you say that “the S&P 500 is the broadest index with documented returns since the 1800s,” but the index was created in 1957. Where does the pre-1957 data come from?

  4. canucktuary on January 21, 2010 at 12:52 pm

    I got a 7….would have done a lot worse if you hadn’t caveated the test at the beginning to say that you took dividends into account!

  5. Ryan on January 21, 2010 at 1:03 pm

    Ed, really interesting post. Really showed me how little I know about the stock market… Kinda sad actually. A real eye opener…

    I typically think of myself as a moderately imformed investor. That being said, most of my investing right now goes through my company group RRSP plan. my wife an I are aggressively focusing on debt, and once that is retired, we will focus on more investing.

    This blog has help me to 1) get inspired to be more aware and focused and 2) focus on debt as it has cripled our progress in the recent past.

    This post has certainly shown me the importance of finding out more about the markets before I dump a bunch of money there blindly.

    Thanks all for the informative site and blog.

  6. Connie on January 21, 2010 at 2:02 pm

    ummm, okay. I guess I am just really bad at the stock market. I bought about 8907.20 worth of stock in 1999. In May of 2008 it was worth 7416. This year it is worth 10,230. I don’t really understand the stock market. I listen to an advisor (many actually) and do my best to make educated guesses and I make 14% in 10 years. Then I lend out my money as second mortgages and I make >20% a year (starting in Jan of 2008)…hmmm I will stick with the mortgages. With mortgages I know how much the building is worth, and I meet the people who are paying me back. I understand people, I understand worth of real estate.

  7. Connie on January 21, 2010 at 2:11 pm

    Actually it is worse than I thought. I had invested another 3711 in 2007. So in effect I lost money over the whole period. Acckkk. And you wonder how people get a bad view of the market?

    To be fair i had asked my advisor to pull it all out in Summer 2009 and he left it in (by mistake) and I made 23% in a few months. I am going to call and thank him for his mistake!!

  8. Krista on January 21, 2010 at 2:55 pm

    It’s an interesting quiz, but I’m not sure if it actually indicates how educated we are. For instance, in the first question the answers are within a pretty small range. So if I thought the worst one-year loss was 54%, but it was actually 44%, am I really a stock market dunce?

    I actually know people who (until this recent crash) thought the stock markets had NEVER made a loss since the depression. But that person wouldn’t be able to display their ignorance unless you gave them some broader options. And on the flip side, by your scoring I’m pretty stupid, but most of my choices were the second best option…

  9. Ms Save Money on January 21, 2010 at 4:02 pm

    @Connie – to be honest I don’t think anyone will know the trends of the stock market – if it were true – we’d all be rich & we wouldn’t be seeking advice from financial analysts (but even they have their gloomy days).

    The stock market is volatile – & goes up and down based on investor confidence (and that’s quite hard to make money off of, based on psychological factors).

  10. Saver on January 21, 2010 at 5:12 pm

    Very interesting quiz! It definitely helps put things into perspective. I have ran the statistics over the past ten year period once before so I had a general idea of the trends. I might just add though that most people would not be inclined to run the statistics or go that far back to study the stock market. I found that personally my perception of the stock market is slightly worse than it is…which reinforces the article caveat about taking dividends into account!

  11. Kathryn on January 21, 2010 at 8:52 pm

    I got 6/12. Where were my perceptions wrong? I thought the risks (highs and lows) were much higher and lower than reality.

  12. Philip in North York on January 21, 2010 at 10:30 pm

    I got only 1 correct answer. Oh, I’m truly an idiot.
    If I chose only one letter for all question, I could have gotten better mark.
    Thank you Ed that my investing success is nothing but luck.

  13. Ryan @ IQ Test on January 22, 2010 at 12:48 am

    Oh man, I bombed that quiz. I really should get a stock broker before I lose all my money doing it myself.

  14. Stanman on January 22, 2010 at 4:41 pm

    Okay I only got 5/12… I guess I’m lucky that I’ve already changed my investment strategy… I read The Little Book of Investing and now I only invest in ETFs…

  15. NewInvestor on January 22, 2010 at 4:54 pm

    I scored a 3! I thought the great depression was even worse than it was, and figured gold would do better than stocks in the last 30 years. Guess I need some studying!

  16. Ed Rempel on January 22, 2010 at 10:10 pm

    Hi FT,

    9 is not bad. Even if you guessed, you would have ruled out ones you thought were wrong, so it still shows that your perception of stock market risk and return is reasonably accurate.


  17. Ed Rempel on January 22, 2010 at 10:22 pm

    Hi Couch,

    Before the S&P500, Standard & Poor’s had an S&P90 composite index with data back to 1926. Alfred Cowles, founder of Cowles Comission for Economic Research, created indexes of all stocks on the New York Stock Exchange back to 1871 using S&P’s market-weighted techniques.

    These were the original sources of the data for my research.


  18. Ed Rempel on January 22, 2010 at 10:25 pm

    Hi Ryan,

    Glad you found it informative. Are you perhaps focusing too much on debt? That is one of the main reasons most Canadians have low net worth. If your debt is affordable and at reasonable interest rates, investing effectively can grow your net worth far faster than paying off debt.

    Note the questions on long term growth in the stock market.


  19. Ed Rempel on January 22, 2010 at 10:46 pm

    Hi Connie,

    Your posts are a classic illustration of the problem with investing that we see with investors constantly. Did you notice when you invested? 1999 and 2007. Both of these years followed big bull markets – and ended up being just before a big bear market.

    Did you notice when you wanted to sell? 2009, after the crash while the market was low.

    The issue is that so many investors lack confidence in the market, which leads them to feel comfortable in investing only after the market has been rising for a while. This means they consistently end up buying high and therefore continually are disappointed by their returns.

    Then after a drop, they are overly scared of another drop and end up selling, even though the facts show that the stock market tends to bounce back surprisingly quickly from declines.

    The key to success in investing is to have the confidence to invest consistently in all markets, and especially when they are low or have fallen significantly low.

    Your gut will always tell you to do the wrong thing. When the market has fallen a lot and is very volatile, the stock market is actually much safer than normal and opportunity is very high.

    The time to be careful is after several years of big gains in the market or a sector. It may look safe and that it will keep going up, but your odds of a big decline are far higher.

    Also, are you sure you understand the risks of 2nd mortgages? Who would pay you 20% when they can borrow on their credit card for less? Are these people that have been cutoff by Visa and Mastercard? How risky is it lending to them?

    The value of the home is not much protection for a 2nd mortgage either. If they stop paying you, you can only foreclose if you buy out the first mortgage. If you don’t have enough money to buy out the first mortgage and they stop paying you, you have little recourse.

    If they don’t pay the first mortgagee, they will foreclose and sell the property off as quick as they can and perhaps at a significant discount from the value of the home. The owners may also leave the place in bad shape so the value is much less.

    Personally, I feel much safer in the stock market. It has always recovered fully from every decline – and much quicker than most people think. If your second mortgage person does not pay, you probably have a permanent loss.


  20. Ed Rempel on January 22, 2010 at 10:55 pm

    Hi Ms. Save Money,

    Nobody knows the direction of the stock market? I do! Up! It always goes up long term.

    The ups and downs are short term and not really relevant. The long term is very reliable.

    And if you want the big gains, wait for a big decline and then invest heavily. Large gains most often follow shortly after large losses.


  21. Ed Rempel on January 22, 2010 at 11:23 pm

    Hi Kathryn & NewInvestor,

    Your comments reflect the most common misperception about the stock market – believing that it is riskier than it actually is.

    The difference between best and worst gets narrow over a few years. The best year was +57% and the worst was -44%, which is 101% difference. However, the best 10-year period is +20%/year and the worst is -1%/year, which is only a 21% difference.

    The longer you invest, the more predictable it is.


  22. Niki Arinze on January 23, 2010 at 10:41 am

    I thought this quiz would be on perceptions. It was more based on knowning actual facts. I don’t think you must know the factual information to have a good perception on stocks. I trade full-time and teach others and I don’t think know the exact facts will improve perception. I think understand the mechanics of markets and then backing that up with a historical foundation is way more important.

  23. Niki Arinze on January 23, 2010 at 10:45 am

    I didn’t want my post to sound like I was dismissing the quiz. I thought it was very informative and fun. Trading myself I thought it would be less factual and more big picturesque to approaching the stock market

  24. Gary on January 24, 2010 at 1:30 pm

    This article isn’t that good. I read it and still have no idea if my perceptions on how risky the stock market is are acurate or not.

  25. FrugalTrader on January 24, 2010 at 1:47 pm

    I should have mentioned that this post is part 1 of a 3 part series. Stay tuned for more info about the risks and returns of the market.

  26. Melanie Samson on January 24, 2010 at 6:12 pm

    I got a 2, but I don’t feel my perceptions are bad. I’m just not a numbers person. I understand the concept of investing and I know what’s right for me.

  27. Melanie Samson on January 24, 2010 at 6:13 pm

    That’s not to say I don’t have lots to learn – I certainly do. But I will probably never be into the nitty gritty of the numbers.

  28. Doctor Stock on January 24, 2010 at 7:01 pm

    EXCELLENT – this is a great resource for investors. It’s like a gut check with a mix of intelligence… go figure!

  29. Trajan on January 25, 2010 at 2:51 am

    I got a 8, mostly due to never having looked at the numbers pre-WWII.
    I start to distrust the really old numbers. How much different is todays world?

    I detect a little bit of cherry picking with the gold numbers. If you choose 1975 instead of 1978, I suspect the numbers turn out differently.
    Not that I think gold is a good investment, I just like playing Devils’ Advocate. :)

  30. Stefan Alexander on January 25, 2010 at 2:14 pm

    4/12, just slightly better than if I had picked randomly… but I did typically pick the closest answer if I did get it wrong.

    Most interesting to me is that a lot of “conventional wisdom” of the stock market don’t actually match well with the facts.

  31. Ms Save Money on January 25, 2010 at 4:28 pm

    @Ed Rempel,

    I agree that if you stick with a stock for long term and if a company you invested in is in good shape- you’ll just ride through and maybe you’ll do well.

    So really, I don’t think you know for sure 100% which direction a stock will go – you can only speculate.

  32. bob on January 25, 2010 at 8:29 pm

    I’m not sure I buy some of your answers.

    Assuming, for simplicity, that everything is held in a TFSA or RRSP and that inflation hits both the same:

    Here is the S&P/TSX Composite Total Return Index (includes dividends)

    * 10 years to August 31, 2009 – 9.41%
    * 20 years to August 31, 2009 – 8.86%
    * 30 years to August 31, 2009 – 10.76%
    * 40 years to August 31, 2009 – 9.77%
    * 50 years to August 31, 2009 – 9.80%

    Subtract 1-2% for MER
    Subtract a bunch because few are 100% invested in equities.

    I don’t see the return being anywhere near what you claim.

    I also don’t see the return on GICs being anywhere near the low return you claim. Trahair’s GIC data show:

    * 10 years to August 31, 2009 – 3.35%
    * 20 years to August 31, 2009 – 5.11%
    * 30 years to August 31, 2009 – 7.28%
    * 40 years to August 31, 2009 – 7.71%
    * 50 years to August 31, 2009 – 7.35%

    Not all that different from equities index once management fees and asset allocation is accounted for.

  33. Michael James on January 25, 2010 at 9:09 pm

    Bob: As long as we’re foolish enough to pay 1-2% MERs, let’s say that we’re foolish enough to just take the GIC rate offered by the bank instead of haggling. That’ll knock off at least 1% right there.

    That apparently small difference in percentage between 50-year returns for stocks and GICs corresponds to a factor of more than 3 in cumulative return.

  34. bob on January 25, 2010 at 10:17 pm


    Except that in order to get the 50-year return for stocks you have to own 100% equities . . . do you?

  35. Michael James on January 25, 2010 at 10:40 pm

    Bob: Yes! I am 100% in equities for my long-term savings, and I pay a minuscule MER. You walked right into that one. I mean that in jest. I prefer to keep things civil. I think we’re both sincere. However, I find Trahair’s arguments to be misleading.

    I’ll grant that most investors are not 100% in equities. So let’s imagine someone 60% in equities and 40% in GICs. This investor would end up with about double the money over 50 years as an investor 100% in GICs. This is a big difference even though the percentage difference each year may be small.

  36. bob on January 25, 2010 at 11:36 pm

    Sure — except that study after study shows that most (like 90%) of equities investors don’t get anywhere near the index . . .

  37. bob on January 25, 2010 at 11:55 pm

    I’m definitely not denying that equities have the *potential* to produce greater — even much greater — returns than GICs. I just object to questions like #9 that make it sound like if you had invested $100 in Canadian Stocks in 1950 you definitely would have had a return of $30,000.

    It might be true in principle — but in practice what % of investors actually achieved that? Less than 5%? Less than 1%?

    Partly because (most) people don’t invest 100% in equities — and especially not for 50 years straight. Anyone who is 100% in equities with 5 years to go until retirement sets themselves up for a pretty big fall if the market crashes on the home stretch.

    Just as you find Trahair’s argument misleading, I find equities arguments such as those misleading. It pretends that it is easy to get (or even beat!) the index. In practice, it is pretty difficult to do consistently.

  38. Ed Rempel on January 26, 2010 at 2:23 am

    Hi Trajan,

    Comparing recent returns to 100 years ago, the returns are similar. The main difference is that the market is much more manic now.

    I wasn’t around then and don’t know for sure, but I have a guess as to why the main difference today seems to be bigger ups and bigger downs, but similar returns over time than 100 years ago.

    I think the average investor is less knowledgeable today, despite all the information available. 100 years ago, it was an “Old Boys’ Club” with most investors knowing the company and CEO, their competitors, they read the annual reports, went to the annual meeting (mostly for the drinks), and they had a good idea what the company was worth.

    There are a lot more trend followers now. So many investors know hardly anything about the companies they invest it, often buying based on a trend or graph.

    It could also be that it is just so much easier to trade and so many more people are trading, but I do think the average knowledge level of investors about their investments in lower today than 100 years ago.


  39. Ed Rempel on January 26, 2010 at 2:24 am

    Hi Stefan,

    That’s why I wrote these articles – because much of the conventional wisdom about the stock markets is wrong.


  40. Ed Rempel on January 26, 2010 at 2:46 am

    Hi Bob & Michael,

    The point of the article is not that you should get the return of the stock market. It is meant to be educational. The returns of the markets are much higher and the long term risk is much lower than most people believe.

    Everyone needs to decide their own allocation, but there is a tendency to have too little in equities because of fears that they are riskier than they actually are. If you invest for the long term and keep investing in bear markets, the long term risks can be surprisingly low.

    If you are able to ride the ups and downs, the returns are much higher.

    You mentioned that being 100% equities 5 years before retirement can set you up for a big crash. That is true, but the part people forget is that the markets have consistently recovered quite quickly. 88% of declines have recovered fully in 1-2 years and the longest recovery was only 4 years (excluding the 1930s).

    Also, most retirees live 20-30 years after retiring. The most common mistake is to have too little in equities and therefore run out of money too soon and not keep up with inflation. The #1 risk of retiring is not a market crash, but running out of money.

    I agree that very few investors earn market returns. That even applies to index investors, since they tend to buy more after big gains and less when the markets are cheap.

    We think everyone should choose their own benchmark from the indexes that represent their portfolio and then regularly compare their returns to their benchmark. That keeps you focused and can help you avoid mistakes.

    For those that want to make index returns or higher, they need a strategy to do that. To beat the index, you probably need to be 100% equities. We have a strategy we believe will beat the indexes over time, which is partly the investments we choose and partly avoiding behavioural mistakes.


  41. bob on January 26, 2010 at 10:22 am

    Hi Ed,

    Thanks for responding. My only concern is, that if the point of the post is to be educational and to reveal the true risks of investing in equities, then you need to actually include what *real* investors actually make from equities, not just index benchmarks. Otherwise, you are just disguising the risk involved by making it sound like $100 invested in Canadian Equities in 1950 would turn into $30,000. There are a lot of missing steps in that equation — and those missing steps are exactly the risk that needs to be presented if you want investors to be fully educated.

    There is, as I know you are aware, lots of publications arguing exactly the opposite — that the general public has been led to believe that the market is less risky than it really is.

  42. Ed Rempel on January 30, 2010 at 10:24 pm

    Hi Bob,

    That is a good point. In addition to the risk of the market, there is the risk associated with the specific investments or investment strategy of the investor.

    Behavioural finance and many studies show the average investor makes far less than the investments they own. This is mainly from bad market timing, which seems to be a fundamental flaw in the human brain when it comes to investing.

    However, this is a separate issue. It is possible to deal with this. Some investment strategies are definitely inferior to others. In general, the more trades and investor does, the worse they do.

    Also, individual stocks would have far higher risk than the market as a whole. They don’t usually publish the standard deviation of a stock like they do with a mutual fund because they are so high. For example, Royal Bank is probably about triple the risk of the TSX.

    How investors do compared to their investments would be another good article.

    This article is about the stock market as a whole and the risks related to it.


  43. Ed Rempel on February 8, 2010 at 2:22 am

    HI All,

    Is anyone else brave enough to post their results? This is not a proper study, but we are very interested in hearing how people did on the quiz and what areas they were not correct about.


  44. Kenneth NG on October 23, 2010 at 3:34 am

    Scored 5

    My answers:

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