A friend of mine recently got a significant raise. When I asked him whether he'd be investing it in the stock market, his reply was clear: "No way; it's gone up way too much." Then he pointed to a few stock charts that looked much like this on his computer.
"How could it possibly keep up that pace? It's a loser's game if you ask me," he said.
Stock charts stink at putting exponential growth in perspective
Sadly, our innate inability to grasp the true power of exponential growth is what's keeping my friend from putting his money in the market. (As an aside, logarithmic charts help solve this problem.)
Yes, it's true that the market has grown by a mind-boggling 23,000,000% since the 1870s, that it has recently been hitting all-time highs, and that (although my friend didn't use this argument) lots of metrics say the market is currently overpriced.
But none of that means the market can't "keep up this pace." That's because no matter the market conditions, exponential growth will always look the same in hindsight: slowly creeping along until it suddenly explodes.
Look back at the stock chart my friend referenced. Check out the decades from 1880 to 1970. It looks like almost nothing happened.
But that's simply not true. If we break down stock market returns into 40-year time frames (from the start of your working life until retirement), starting in 1886, here's what they look like.
Exponential growth was consistently taking place, enriching millions of everyday Americans. In the real world, of course, it's never a smooth curve, as the graph shows. But the end result is the same: lucrative profitability.
What this means for investors
Let's take it a step further and include rolling investing time frames as far back as 1880. When we average the 40-year returns starting in 1880, 1890, 1900, and so on, all the way up to 2010, this is what they would look like.
Of course, there were periods of time when investing in an "expensive" market wouldn't have been fun. If you invested right before the Great Depression, you would still have been down 20% a decade later. But if you would have stayed invested for 40 years, you would have been sitting on a pile of cash that grew 2,200%.
Does that mean that investing in today's market is a sure bet? Over the short term, absolutely not. But we're not short-term investors here at The Motley Fool. We believe that investing is an activity best pursued with a long-term time horizon.
History has shown us that, over a long enough time frame, investing has always been a profitable endeavor, no matter the market conditions.
Brian Stoffel has no position in any stocks mentioned. The Motley Fool recommends and owns shares of Ford. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.