It's time in the market, not timing the market, that counts
by Jason LillyWhat’s in a day? Actually, it turns out, quite a bit when it comes to the stock market. With the recent increase in market volatility, we decided to take a look at the impact of short-term market activity versus long-term results. Simply put, the chance of investing in the market on a day that closes higher is as good as the chance of a coin toss landing heads up.
As a frame of reference, we looked at returns for the S&P 500 over the last 50 trading days, 50 trading quarters, and 50 trading years. Results are presented in Table 1 and show that the chances of making money in a day are only slightly better than losing money on that day.
Odds improve a bit if you are willing to stay invested for 3 months (1 quarter). However, if you tune out the daily “market noise” and commit to an investment holding period of one year, your odds of losing drop to only 24 percent. That is to say, with 100 percent of the portfolio in stocks, on average, you would expect to have one negative year in a four-year period. Even more interesting are the results over longer time periods, with positive results improving dramatically.
The key to long-term financial success is in identifying an appropriate asset allocation, creating a diversified portfolio, regularly rebalancing, and, of course, holding firm through short-term market fluctuations. The graph below reinforces the merits of this approach.
These results imply that the odds of losing money in any one day are approximately 46 percent. The chance of loss over a week was approximately 43 percent; yearly, 21 percent in any 5 year period, 7 percent; and in any 10-year period, about 0 percent%**. Stated another way, if you invest in the stock market for a five-year period, you have a 93 percent chance of making money. If you have a 10-year time horizon, in no instance would you have lost money. (Past performance is not indicative of future results.)
Nevertheless, it’s important to keep the results of this analysis in context. If your investment horizon is three quarters, it would not be appropriate to be fully invested in stocks. On the other hand, a recently retired couple should not sell all their stocks and buy bonds. A couple in their 60s has a very good chance of at least one spouse living into their 80s. This time horizon implies a portion of a portfolio invested in stocks would still be an appropriate investment for growth, and as a hedge against inflation. Thus it is more important that you are invested in the market over a long-period of time versus trying to time the market, if you want to assure the potential for more positive returns in your portfolio.
Jason Lilly is a Certified Financial Analyst, Certified Financial PlannerTM and Portfolio Manager with the Investment Management Group at Rockland Trust. He can be reached at jason.lilly@rocklandtrust.com.
Source: Standard and Poor’s, Investment Management Group, Rockland Trust
* S&P 500 returns. Daily returns as of August 22, 2007; Quarterly, as of June 30, 2006; annually, as of 2006.
** S&P 500 returns 1/1/1950 – 12/31/2006. Standard and Poor’s is a registered trademark. Securities and other investments are not FDIC insured, are not bank deposits, are not obligations of the U.S.Government and may go down in value.
Published in Cape Business November/December 2007
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