Most Inside article: Toronto-based Financial Planner Ed Rempel Debunks The Random Walk Theory

“The stock market is random.”

That’s what Random Walk Theory suggests.

But when you look at market history, the evidence tells a very different story.

In periods of extreme market stress, something interesting often happens. Large losses are usually followed immediately by large gains.

A few things investors often overlook:

• The biggest market losses and gains often happen close together.
• Severe declines create rare buying opportunities.
• Investor behaviour such as fear, panic, and herd thinking drives many market moves.
• Some of the strongest bull markets happen when sentiment is the worst.
• Stocks are less risky & more reliable over 20-year periods than random walk suggests.
• Bonds & cash are more risky and less reliable over 20-year periods than random walk suggests.
• A simple way to beat the markets.

Markets may feel unpredictable in the short term, but they often reflect something very consistent: human behaviour.

In this article I explain why market history challenges Random Walk Theory and what long-term investors can learn from it.

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Most Inside article: Toronto-based Financial Planner Ed Rempel Debunks The Random Walk Theory

In periods of extreme market stress, fear tends to travel faster than facts. During the week of March 16 to 20, 2020, global markets dropped roughly 18 percent in a matter of days as the early reality of Covid set in. Many investors opened their accounts to see losses approaching 30 percent and assumed the worst was still ahead. What followed instead was one of the sharpest rebounds in modern market history, with stocks gaining more than 12 percent the very next week.

That pattern is not an exception, according to Toronto-based financial planner and blogger Ed Rempel.

He argues that large market losses tend to cluster with large gains, a behaviour that runs directly against the popular belief that markets move in an unpredictable random walk.

“The largest losses and the largest gains are usually right after each other, “Rempel says. “That tells us markets react emotionally in the short term, not randomly.”

The random walk theory suggests that stock prices move independently from one period to the next, much like flipping a coin. Yesterday’s outcome does not influence tomorrow’s result, and patterns are seen as illusions rather than useful signals. This idea is closely tied to the efficient market hypothesis, which claims that prices already reflect all available information at any moment.

Market history tells a different story.

If those ideas held up in real life, investors would have little reason to analyze past market behaviour. Timing would never work. Fundamental research would add no value. Crashes and bubbles would represent fair prices, even when driven by panic or euphoria.

Large market declines are rare, but when they happen, they are almost always followed immediately by strong recoveries. Severe downturns stand out as unusual events, and the market response that follows them is anything but random.

Behavioral finance helps explain why. Investors tend to herd, overreact to headlines, and anchor decisions to recent price levels. Loss aversion leads people to sell near market bottoms and hesitate to reenter, even when conditions improve. Those emotional reactions push prices well below long-term value during crashes, setting the stage for sharp rebounds once fear subsides.

Academic research has also challenged the idea that stocks behave like a random walk over long periods. In his book Stocks for the Long Run, Professor Jeremy Siegel examined how volatility changes over time for stocks, bonds, and cash. He found that the longer stocks are held, the less unpredictable they become compared to what random walk theory would suggest. Bonds and cash did not show the same improvement, particularly during extended periods of inflation.

In other words, stocks are significantly less risky and more reliable over 20-year periods and longer than the random walk suggests. Bonds and cash are the opposite, being significantly more risky and less reliable over 20-year periods than random walk suggests.

The reason, Siegel noted, is that extreme stock market losses are usually followed by strong gains, while poor returns in bonds or cash tend to persist. They are usually caused by inflation which tends to remains high for extended periods.

Rempel applies this idea in a practical way. His approach is not about predicting exact turning points or abandoning diversification. Instead, he focuses on staying invested and recognizing when fear has pushed markets into rare territory.

“When the market drops more than 20 percent, history shows it has almost always been a good buying opportunity. You don’t need perfect timing. You need the discipline to act when others are frozen,” says Rempel.

The strategy can be a simple way to beat the markets. Investors stay invested during normal conditions focused on index-like returns or better. When a major decline occurs, additional money is invested while stocks are on sale.

It may take some creativity to find extra money to invest. It might mean accelerating contributions, using savings earlier than planned, or temporarily borrowing with a repayment plan. The specific method matters less than recognizing the opportunity.

Waiting on the sidelines for a crash is not part of the plan. Severe declines are too infrequent for that approach to make sense. On average, losses of more than 20 percent appear about once every 17 years, though they sometimes arrive closer together. Delaying long-term investing in anticipation of the next crash usually costs more than it saves.

Losses of more than 20 percent occur in roughly six percent of calendar years. Gains of more than 20 percent occur far more often, appearing in more than one-third of all years since the 1920s. That imbalance matters. That is why buying after a market decline almost always works, while selling after a market gain rarely works.

Real-world examples support the approach. After the market fell roughly 40 percent during the 2008 financial crisis, many investors exited stocks entirely. In early 2009, stock funds saw tens of billions of dollars in withdrawals. By the end of that same year, the market had risen more than 25 percent.

The Covid crash followed a similar path. Markets fell more than 30 percent in a month, then recovered most of those losses within weeks. Investors who added during the decline were rewarded quickly.

This pattern explains why discussions involving Ed Rempel often focus on his emphasis on investor behaviour rather than short-term forecasts. His work reveals how emotional reactions, not randomness, drive the most dramatic market moves. These discussions tend to return to one core message: understanding market history can lead to better decisions during stressful moments.

“The market is not a coin flip. It reacts to human behaviour, and human behaviour follows patterns,” Rempel concludes.

The random walk theory is influential in textbooks, but market history tells a different story. For long-term investors, recognizing that large losses are usually followed by large gains can turn fear into a strategic advantage. Buying more after a market decline of more than 20% can be an easy way to beat the market.

Ed