Episode Resources

• Sam Ro: 5 Myths and Misunderstandings About Investing in the Stock Market
• Mean Reversion in the Stock Market Is an “Optical Illusion”
• “Valuation Metrics Are NOT Historically Mean-Reverting”
• Cullen Roche: Valuations Matter – Just Not the Way Wall Street Says
• Skewing Success: Why Most S&P 500 Stocks Trail the Average Stock
• One Hundred Years in the U.S. Stock Markets – Hendrik Bessembinder (2026)
• Morgan Stanley: Drawdowns and Recoveries: Base Rates for Bottoms and Bouncesahan
• Why 2 Retirees With the Same $1M Plan Ended $3M Apart – Stay Wealthy
• Why You Shouldn’t “Buy the Dip” With Nick Maggiulli – Stay Wealthy

Episode Transcript

On August 18th, 1913, a crowd gathered around a roulette table at the Monte Carlo Casino in Monaco.

The ball had landed on black several spins in a row. And as the streak kept growing, the gamblers watching it reached a conclusion that felt like common sense: red was due.

So they started betting on red, and each time black came up again, many of them increased their bets.

By the time it finally ended, the ball had landed on black 26 times in a row, and gamblers betting money on red had reportedly lost millions. 

At first, a story about roulette might seem to have little to do with your retirement. But the instinct those gamblers trusted is one that many investors bring to the stock market, too – the belief that things tend to even out.

For example, you may have heard someone say the market is “due” for a pullback after a few strong months or years, or that stocks have gotten too expensive and have to come back down. 

Ideas like these sound reasonable, and they get repeated often. But when you look at the evidence, some of them don’t hold up as well as you might expect.

So today, I’m walking through five common myths about the stock market, what the historical evidence suggests about each one, and how I think about them as a retirement planner.

Whether you’re still building your nest egg or already drawing from it, my hope is that the next time one of these ideas shows up in a headline or a conversation, you’ll have a clearer way to decide whether it should influence your long-term investment decisions.

Welcome to another episode of the Stay Wealthy Retirement Show. I’m your host, Taylor Schulte, and every week I cover the most important financial topics to help you “stay wealthy” in retirement. Ok, onto today’s episode.

5 Stock Market Myths That Sound Smart (But Could Cost You in Retirement)

There’s actually a name for the mistake those gamblers made back in 1913, which I’ll get to in a moment. But first, a quick roulette refresher, since I know you’re all responsible long-term investors and not degenerate gamblers.

On a European roulette wheel, there are 18 red pockets, 18 black pockets, and one green zero. You can make all kinds of bets, but the simplest is just picking red or black. The dealer tosses a small metal ball into the spinning wheel, and because of that lone green pocket, your odds sit just shy of 50% – practically a coin toss. 

But that’s the probability of a single spin. The odds of landing on black 26 times in a row, on the other hand, are roughly one in 137 million. To put that in perspective, that’s about the same as a very average golfer like me making back-to-back holes-in-one.

But here’s the important distinction that is easily overlooked in the heat of the moment: Even after the ball had landed on black 25 consecutive times, the probability of landing on red on that 26th spin was still about 50%. No different than that very first spin.

And that’s because a roulette wheel has no memory. Each spin is independent of the one before it, which means a long streak in one direction doesn’t make the opposite outcome any more likely. 

Psychologists call this mistaken belief the gambler’s fallacy. And because of that famous incident in 1913, it’s also commonly referred to as the Monte Carlo fallacy. 

Now, the stock market is not a roulette wheel, and prudent investing is not the same as gambling. When you buy a stock, you’re taking ownership in a real business that serves real customers, generates real revenue, and has the potential to grow its profits over time. While stock prices can be unpredictable in the short term, their long-term performance is closely tied to the success of those businesses. But investors can still fall into a similar trap, believing markets should behave a certain way simply because it sounds logical, even when the evidence suggests otherwise.

And that brings me to a recent article by Sam Ro, a CFA charterholder and founder of the newsletter TKer.

In his article, Sam examines five common beliefs about the stock market that, in his words, “make intuitive sense, but the evidence supporting them is shoddy.”

He also makes an important point about why this matters: When investors act on beliefs that sound reasonable but aren’t supported by reliable evidence, the consequences can be costly, potentially leaving them with significantly less money to support their multi-decade retirement.

So, with that in mind, I want to walk through each of Sam’s five market myths, dive a little deeper on each one, and share my own thoughts on what these findings mean specifically for retirement savers.

And we’ll start with the one those gamblers in Monte Carlo would have recognized right away.

Myth #1: Stock Market Returns Revert to a Mean

The first myth is the idea that stock market returns revert to the mean. In other words, strong stretches in the market should be followed by weak ones, and weak stretches should be followed by strong ones.

And it’s easy to see why this idea is so popular. If you pull up a long-term chart of the stock market and draw a trendline through it, you’ll see prices move above that line for a while and then fall below it. Looking back, it can appear as though the market is constantly being pulled toward some kind of historical average.

But here’s the problem: identifying a pattern in hindsight is very different from being able to predict it in real time.

As Sam points out, the professors behind the UBS Global Investment Returns Yearbook, one of the most respected long-term studies of market history, examined this very idea. They concluded that the popular evidence for mean reversion is “an optical illusion that employs hindsight.” In the study, they even compared the belief to the gambler’s fallacy, the very same mistake made by those gamblers in Monte Carlo.

More importantly, when researchers tested whether an investor could actually profit from this concept, the numbers were sobering: market-timing strategies built on mean reversion consistently led to lower investment returns, not higher.

And the historical reality is even more counterintuitive.

One of the most surprising statistics I’ve shared on this show is that investing at all-time highs has historically produced better returns than investing on any other day.

More specifically, according to research shared by Peter Mallouk, from September 1989 through November 2025, the average five-year return after investing in the S&P 500 at an all-time high was 82%. Investing on all other days produced an average five-year return of 74%.

Now, does that mean buying at record highs is a guaranteed win? Of course not. But it completely dismantles the idea that a strong market is a red flag, or that record highs are an automatic signal to sit on the sidelines and wait for a dip.

And to be extra clear: yes, great years are sometimes followed by down years. Of course they are. But strong years are just as often followed by even stronger years, and bull markets have a track record of running far longer than anyone can predict. In other words, these swings simply aren’t consistent or predictable enough to build a reliable investment strategy around.

As Sam put it, “What just happened won’t tell you what’s coming next.”

So, if recent returns can’t tell you much about where the markets are headed in the future, the natural follow-up is whether valuations can, which brings us to the second myth.

Myth #2: Valuations Revert to a Mean

The second myth is that stock market valuations always return back to their historical average, and that investors can use this pattern to determine when it’s best to buy or sell stocks.

One of the most common ways to measure whether stocks are cheap or expensive is the price-to-earnings ratio, or P/E. Put simply, this ratio compares the price you’re paying for a stock to the profits the company earns. 

When the P/E is above its historical average, stocks are considered expensive. When it’s below average, they’re considered cheap.

From there, it’s tempting to assume that expensive markets will eventually get cheaper, cheap markets will eventually get more expensive, and that you can use this pattern to decide when to be in or out of stocks.

But that assumes the historical average is a fixed target.

As Sam points out, analysts at Goldman Sachs have been challenging this assumption for more than a decade. In January, they wrote, “We cannot emphasize enough that valuation metrics are NOT historically mean-reverting.” Said another way, what counts as “normal” is a constant moving target.

And there’s a great example of why this matters. When Nick Maguilli joined the show a few years ago, he described an investor who, in early 2017, was convinced the market was overpriced and decided to sit on the sidelines until the inevitable crash. 

Well, that crash eventually arrived three years later. In March 2020, the S&P 500 fell roughly 34% in a matter of weeks.

But even if that investor had a working crystal ball and invested every dollar at the exact bottom on March 23, 2020, they still would have paid prices roughly 7% higher than they could have paid back in early 2017.

In other words, predicting that a crash will eventually happen isn’t enough – you also have to account for all the gains you might miss while waiting for it.

And some recent research adds even more perspective to this problem.

Last month, Cullen Roche published a new research paper testing whether investors could improve their returns by moving between stocks and bonds based on market valuations.

He tested this hypothetical investment strategy going all the way back to 1901 and the rules were simple: own stocks whenever stocks were undervalued and move into 10-year Treasury bonds whenever they were overvalued. 

And for decades, the strategy looked successful. But as the portfolio went through periods where valuations remained elevated and stocks continued climbing, it missed years of market gains. By October 2026, this market timing strategy had fallen approximately 70% behind simply buying and holding stocks for the long run.

As Cullen puts it, “You can be right about where it ends up and still get killed waiting.”

Now, just because valuations are a poor market-timing tool doesn’t mean they’re useless for financial planning.

In fact, while Cullen concluded that starting valuations explained very little about stock market returns over the following year, he did find that they provided meaningful information about the range of potential outcomes.

For example, looking back over the last 140 years, if you bought stocks when the market was in its top 20% most expensive range, you lost money over the next decade roughly one out of every four times. But if you bought when prices were at their absolute cheapest, that never happened once.

In Cullen’s words, “A high valuation is really just a high expectation.” And when expectations are high, there’s less room for things to disappoint.

And this distinction is especially important for retirees, who often need to sell investments regularly to fund their lifestyle.

As we discussed in my recent episode about two retirees who started with the same $1 million portfolio but ended up $3 million apart, the returns you experience early in retirement can have a significant impact on your long-term financial security.

To be extra clear, retiring when stocks are expensive doesn’t mean a crash is around the corner. However, starting valuations can be a reasonable signal to use more conservative long-term return assumptions, give extra thought to your starting withdrawal rate, and make sure your retirement income plan has some flexibility built in.

To me, that’s where valuations are most useful: helping you make more informed planning decisions, not telling you when to get in or out of the market.

So if neither past returns nor valuations can reliably tell you when to own stocks, it’s tempting to think the answer is owning the right ones. And that brings us to the third myth.

Myth #3: Picking a Market-Beating Stock Is Like Calling a Coin Flip

The third myth is that picking a market-beating stock is like successfully calling a coin flip.

At first glance, it seems reasonable. Some stocks outperform, and some don’t, so you might assume half of them fall on either side of the average. And if you do a little bit of research, perhaps you can tilt those odds in your favor.

But the data tells a very different story.

In a study published last year, S&P Dow Jones Indices found that from 2001 through September 2025, just 19% of S&P 500 companies earned returns above the average stock. Said another way, that means roughly four out of five stocks fell short of the average return.

How exactly is that possible?

Well, because the stock market’s long-term returns are driven by a relatively small number of companies that produce extraordinary gains. Those big winners pull the average up, even though most individual stocks fall well short of it.

Think of it this way. Imagine you’re in a room with 99 people who each have a net worth of $50,000. Then a billionaire walks in. Suddenly, the average net worth in the room jumps into the millions, even though nothing has changed for the other 99 people.

Stock market returns work in a similar way. Researchers call this positive skewness, and some of the most compelling evidence comes from Arizona State University professor Hendrik Bessembinder, whose work I’ve covered extensively on this show.

In his most recent study, Bessembinder examined nearly 30,000 U.S. stocks over the 100 years ending in 2025.

He found that just 46 companies accounted for half of all the wealth created in the U.S. stock market. Furthermore, he found that only about 28% of the stocks outperformed the overall market over their lifetimes.

Even Warren Buffett has credited Berkshire Hathaway’s remarkable investment performance to “a few winners.”

So the challenge isn’t simply finding a good company. The nearly impossible challenge is identifying the relatively small number of companies that will produce extraordinary returns, often years before anyone knows which ones they’ll be.

And that’s one of the strongest arguments for broad, global diversification.

As I try to continue to reinforce, successful long-term investing does not require you to identify the next big winner ahead of time. By owning the global markets through a diversified mix of low-cost index funds, you can participate in the success of those companies without having to predict which ones will come out on top.

And let’s not forget, even if you manage to beat the odds and pick one of those rare winners, holding on to it through periods of extreme volatility can be a challenge of its own.

Which brings us to the fourth myth.

Myth #4: Holding a Market-Beating Stock Is a Fun Experience

The fourth myth is that holding a market-beating stock is a fun experience.

It certainly sounds like it should be. After all, who wouldn’t want to be an owner of one of the best-performing companies in the world? 

But as Sam warns, if you’re fortunate enough to find one of these rare winners, “Buckle up.”

In a report published last year, researchers at Morgan Stanley, along with the well-known investment strategist Michael Mauboussin, examined the 20 stocks with the highest total returns over the 40 years from 1985 to 2024.

These were some of the biggest winners of the last four decades. And yet, the typical stock in that group experienced a staggering 72% decline from a previous high along the way.

Perhaps even more surprising, those declines took nearly three years to reach the bottom, followed by more than four years, on average, to recover.

And if you’re not familiar with break-even math, a 72% decline is even more painful than it sounds.

For example, if an investment loses 50% of its value, it needs a 100% return just to get back to even. After a 72% decline, it would need to gain more than 250% to fully recover.

We’ve seen this play out with some of the most successful companies in history.

Amazon, for example, lost roughly 95% of its value after the dot-com bubble burst. More recently, both Facebook and Netflix experienced drawdowns of nearly 80%. 

Even Warren Buffett’s Berkshire Hathaway lost nearly 50% of its value between 1998 and 2000, while technology stocks gained 225% over the same time period. 

And remember, these are companies we now recognize as enormous success stories. Imagine experiencing those declines without knowing whether your investment would ever recover.

As Sam acknowledges, watching one of your investments lose 72% of its value would be incredibly difficult, even knowing that such declines have been common among the market’s biggest long-term winners.

And for retirees, there’s an additional concern. A significant decline in a concentrated investment isn’t always something you can simply wait out.

A while back, we sat down with a new client, we’ll call her Diane, who looked ready to retire on paper. But a large percentage of her wealth was tied up in her company’s stock, and right as she was planning to retire, it dropped more than 50%. And this wasn’t a small, speculative start-up company either. It was Intel, one of the world’s largest semiconductor companies. 

Diane’s situation is a good reminder of why we pay close attention to concentration risk, especially as retirement approaches.

And by the way, that risk isn’t limited to individual stocks. Even a low-cost S&P 500 index fund, while diversified across hundreds of companies, can leave you overly concentrated in U.S. large-cap stocks if it makes up most of your retirement savings.

When you’re relying on your portfolio to fund your lifestyle, you may need to sell investments during a downturn. And selling shares at depressed prices can make it much harder to recover financially, even if the market eventually rebounds.

Of course, none of this means that every great stock will experience a 72% decline, or that holding on through every downturn is always the right decision. The point is that even the most successful investments can test your patience, and there’s no way to know in advance which struggling stocks will eventually recover.

It’s a good reminder of a timeless rule I share frequently: that the best investment is the one you can stick with. And that starts with building a portfolio that aligns with your unique goals and your ability to handle risk.

Now, most investors don’t own individual stocks that experience 72% declines. But even a broadly diversified portfolio rarely delivers the smooth, predictable returns people expect.

And that brings us to the fifth and final myth.

Myth #5: The Stock Market Often Delivers Average Returns

The fifth and final myth is that the stock market often delivers average returns.

As Sam notes, one of the first things many of us learn about the stock market is that its average annual return is somewhere around 8% to 10%

And while that’s a useful long-term average, it’s easy to assume the market delivers something close to that return fairly regularly.

But history tells a very different story.

Stock market strategist Ryan Detrick recently ran the numbers and found that since 1950, the S&P 500 has returned between 8% and 10% in only four calendar years. I’ll say it again so it sticks. Across the last 75 years, the S&P 500 has finished the year with a return between 8% and 10% just four times.

The lesson isn’t that the long-term average is wrong or that we should ignore it when making financial plans. It’s that the average tells us very little about what we should expect in any given year. And that’s because the long-term average is the result of combining a lot of unusually good years with some pretty painful ones. 

And rather than viewing those big swings as a sign that something is wrong with the market, I’d encourage you to think of them as part of the price of admission. After all, stocks offer the potential for higher long-term returns than safer investments precisely because they come with greater risk and uncertainty. Those higher returns aren’t guaranteed, and they certainly don’t arrive on a predictable schedule.

Here’s another way to think about it. If the stock market actually delivered a reliable 10% return every single year, it would be considered as safe as a savings account and, in turn, would pay just as little.

Now, for retirees, there’s another important consideration. It’s not just how much the market returns over time, but the order in which those returns occur. Two retirees can own the same portfolio with the same long-term average return, yet the one who suffers a major downturn early in retirement can end up in a much worse position, because they’re forced to sell more of their investments at lower prices to fund withdrawals.

And this is one reason we recommend building a war chest of cash and bonds for our clients, typically enough to cover two to three years of planned withdrawals, and sometimes up to five for more conservative investors. 

As I’ve shared before, staying invested is what gives your money the opportunity to recover from a poorly timed downturn. And having that financial buffer is what makes staying invested possible. 

Ultimately, we can’t control whether the market delivers an average year, an extraordinary year, or a terrible one. But we can build a retirement plan that doesn’t depend on getting average returns when we need them most.

Bottom Line

Let’s bring it back to where we started, at that roulette table in Monte Carlo in 1913.

Those gamblers weren’t wrong to think the streak of black spins would eventually end. They were wrong to believe that each new spin made red more likely, and to risk money on that assumption. 

While the stock market is clearly not a roulette wheel, smart, prudent, long-term investors can still fall into a similar trap when an idea about how markets should behave starts to feel like a reliable prediction. 

And that’s really the common thread connecting these five myths.

It’s easy to identify patterns when you already know what happened. It’s much harder to use those patterns to make investment decisions that consistently improve your future results.

And when you’re relying on your portfolio to fund your retirement, the consequences of getting those decisions wrong can be significant.

So, rather than spending your time trying to predict what the market will do next, I’d encourage you to focus on the decisions you can actually control: how your portfolio is diversified, how much you spend, how you fund your near-term income needs, and how much flexibility you’ve built into your retirement plan.

And here’s a great question to ask yourself to test how prepared you are for uncertainty: “If the market behaves very differently from what I expect over the next few years, will my retirement plan still work?”

Because ultimately, that’s what good retirement planning should accomplish. It should give you the confidence to navigate a wide range of market conditions without having to make predictions about what comes next.

As Charlie Ellis once said, “The average long-term experience in investing is never surprising, but the short-term experience is always surprising.”

Thank you, as always, for listening. To view the research and resources referenced in today’s episode, just head over to youstaywealthy.com/309

Disclaimer

This podcast is for informational and entertainment purposes only, and should not be relied upon as a basis for investment decisions. This podcast is not engaged in rendering legal, financial, or other professional services.