Odds Favor Investing Now

As an investor, you come up with an overall approach to meet your objectives and then bring in the stocks, bond, real estate etc. to your portfolio to execute the plan. Of course you expect that there will be frustrations along the way - just like we can’t control the weather, we can’t control the markets. But, if you are willing to put up with the frustrations, by the end of your investment time horizon, you should be able to enjoy the retirement you’ve always dreamed of.

Historical Statistics

Anyone investing for a long time should expect markets to go down sooner or later, but the long-term trend has always been up. In 183 years of equity markets in the U.S. performance was positive 70% of the time and negative only 30% of the time. Years like the one 2008 is shaping up to be are extremely rare. In fact, the only complete calendar year that lost over 40% was 1931. Conversely, the market improved by more than 40% ten times.

The chart below shows the frequency of positive and negative calendar year returns in the U.S.

There are two key messages to take away from this chart:

1. The market performance of 2008 is well outside the norm. Looking at history, it seems unreasonable to expect such negative returns to keep recurring.
2. Investors often focus on average returns, but the long-term experience of the market is very different from the average. The average U.S. equity calendar year return is approximately 8%, but in any given calendar year there’s less than a 25% chance of a return in the range of 0 to 10%. Returns outside that range should be expected - both positive and negative.

Additionally, what you can’t see in the chart is that four of the five best years (over 50% return) occurred immediately following a negative year.

With 2008 being the worst calendar year in recorded history for equity returns, do you think that the possibility is increased for history to repeat itself with 2009 rebounding with a potential 50%+ return? While we have history as a guide, only time will tell if these statistics will hold true in the future.

Comments

[herbert hoover:]

There's no reason to buy now when you can get the same stocks at a discount next year. That's why they call it a Bull Market.

2008 Dec 04 12:46 PM

[whidbey:]

The message is we don't know what is happening, and history may not be helpful if we are blindsided by random events. At best a 5% position with stops and maybe a strangle.

2008 Dec 04 05:22 PM

[William Samedy:]

Interesting numbers and if we take past behaviour as our base premise we should go long with leverage.

Considering what went wrong in that cycle www.leveragedinsight.c... I would leave a little room for a possible outcome different from our premise.

2008 Dec 05 03:16 PM