This semi-log scale chart is the one that stock brokers and financial advisors typically use, because it goes up and to the right which supports the concept of stocks for the long run, the observation that we are always either in a bull market, or just about to enter one, and that, to avoid the negative effects of inflation, you must invest a certain portion of your portfolio in equities, in the stock market.
The semi-log scale chart has the advantage that it shows the earlier bull & bear market cycles much more clearly than does the equivalent linear scale chart, shown below:
(1) Downloaded S&P 500 Index monthly close data from 1950 to 2012, from Yahoo! Finance (symbol: ^GSPC).
(2) Identified monthly, absolute peak value (1549.38), Oct., 2007.
(3) Identified 17 bull & bear market cycles - start month, peak month, end month.
(4) Normalized monthly data for each of the 17 bull & bear market cycles so they could be plotted on the same Y-axis chart.
(5) Graphed the data:
Here is the chart of the 17 cycles. We notice several things:
(1) Bull markets are typically twice as long as bear markets. However, bull markets do not last forever. They all end. The longest, at 61 months, was the 2002-2007 bull market portion of the 2002-2009 cycle.
(2) Bull markets grow more slowly, at about half the rate that bear markets decline.
(3) Every bull market eventually peaks and becomes a bear market.
(4) Earlier bear markets only gave up (retrenched) a portion of their bull market growth, so the overall market trend was upward over time. In the past 15 years, however, that has not been true.
The current 2009-2012 bull market is shown on the chart as a solid black line. Since it has not yet peaked, I had to estimate its position. I made the assumption that it will peak in February, 2013, five months in the future. The farther we are from the actual peak, the more the solid black line will be shifted to the left.
The most important take-away from this analysis is the understanding that bull markets do not last forever. Furthermore, if you enter the stock market in the late stage of a bull market, you will likely sustain market losses in the subsequent bear market, losses that may take years, or even decades, to erase in the subsequent bull market.
This is why analysts are consistent in saying that your expected stock market return over the decade following an investment is highly dependent on when you make the investment. Invest early in a bull market and you can expect decent returns; invest in the late stages of a bull market and you are practically guaranteed sub-par returns.