For some investors, the recent market turmoil has been nausea-inducing. Should they reduce exposure given the pending sharp recession, or should they add exposure into weakness for the inevitable rebound? From anecdotal conversations with friends, some have let the waves of market volatility wash over them and have lost the horizon. Which way is up?
Over long-term horizons, the path has not changed. One immutable fact about markets is the longer your horizon, the more likely you are to make money.
In the chart below, I have looked at a long-term series of index levels for the S&P 500 (SPY) and its predecessor indices dating back to 1927. I did some simple calculations. How often was the index higher over forward periods?
Over that long dataset, which includes over 23,000 trading days, investors were likely to see the market rise on 52.3% of days. Expand that to rolling 5 day periods, and the market tended to rise 56% of the time. Extend it to the number of trading days in a typical month, and that figure rose to roughly 60%. As you expanded each of the time horizons, the likelihood increased that your money would grow. Expand that horizon to 10 years, and 88% of the time, investors would make money. Recall that I am using a price index. If I included dividends and turned that price return into a total return, that figure would be even higher.
I was actually surprised that the 10 and 20 years numbers were not higher using a simple price index. While including dividends would have certainly helped the figures, shortening the horizon to exclude the Great Depression also demonstrated a greater likelihood of long-term gains as seen in the chart below.
Since the end of World War II, every rolling 20-year period has seen equity market gains. More than 93% of 10-year periods have featured gains, excluding some rare periods that eclipsed multiple domestic economic recessions.
Some investors might counter that their investment horizon does not extend 10 or 20 years. (I thought the nearly 85% chance of gains over a 3-year period was a powerful statement from this nearly 75 year dataset). Even if you do not have as long of a time horizon as other investors, I hope this article encourages readers to lift their eye level from the current daily volatility. Tomorrow is little better than a coin flip, but over longer horizons, the odds are ever in your favor. Stocks are cheaper. The pandemic and resultant economic fallout of expansive quarantines is a reason. This pandemic – like previous crises before it – will pass. Stocks of U.S. companies will again prove to be a path to compounding investor wealth over time. Time heals portfolio wounds too.
Disclaimer: My articles may contain statements and projections that are forward-looking in nature, and therefore inherently subject to numerous risks, uncertainties and assumptions. While my articles focus on generating long-term risk-adjusted returns, investment decisions necessarily involve the risk of loss of principal. Individual investor circumstances vary significantly, and information gleaned from my articles should be applied to your own unique investment situation, objectives, risk tolerance and investment horizon.
Disclosure: I am/we are long SPY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.