Investing in the stock market is emotionally difficult because of the possibility of loss. The market fluctuates from day-to-day and month-to-month and can be wildly erratic. It is all but impossible to consistently predict its direction successfully.
Despite the random nature of short term stock returns, investing in the stock market is not like a casino, where the house has an edge. The longer you stay at a casino and gamble, the more likely you will lose money. In the stock market, the opposite holds. The odds of success improve as holding periods increase. In the market, staying the course over the long-term puts the odds in your favor.
The table below shows the probability of gains and losses in the S&P 500 over various time spans since 1926.1 The lesson is clear – as the holding period increases, the likelihood of success increases. The probability of a positive return drawn from these 1,200 historical monthly observations is 62.7 percent. Not bad, perhaps. But this implies a strong chance, 37.3 percent, of a loss.
As the holding period increases, the historical probability of a gain increases. Over one year it leaps to three out of four. Over ten years or more the chance of success eclipses 95 percent. In this data set, there was not a single 20-year period during which the S&P 500 lost value.
Past performance is not a guarantee of future results. However, the historical evidence suggests one of the best ways to put the investment odds in your favor is to increase the holding period and invest for the long-term.
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The Dow Jones Industrials Ranked By Yield
Asset Class Investment Vehicles
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