The Math Is in Your Favor!
By Todd Gray, Portfolio Manager
Among several quotes of wisdom that I have taped on my desk is one that says: “Be Profound, Be Funny, or Be Quiet!”
In recent years I have done my best to put the above quote into daily practice, although my colleagues and my wife may argue that I have been less than successful at this. I am not sure the topic of this communication can be classified as “profound”, but I think the subject matter is important for all stock investors to remember, especially during periods of market volatility and political uncertainty. The subject matter that I wanted to reinforce with each of you is that over the long-term “the math” favors stock investors.
I admit that I am a bit of a numbers geek, starting as a child when I would study baseball statistics, and then in adulthood as I became interested in probability analysis. While I understand that numbers don’t always tell the whole story, especially when it comes to the world of investments, a look at the numbers can help keep fear and emotions from driving investment decisions.
Historically, the U.S. stock market has, on a day-to-day basis, been up approximately 55% of the time, which is not much better odds than making a bet on a coin flip. However, when you look at longer periods of time, you will see that the probability of stocks going up increases significantly. Looking at the period of 1926 through 2019, the U.S. stock market, on a calendar year basis, has produced positive returns approximately 73% of the time. The odds of making money improves further when you look at five, ten and fifteen-year periods of time. The U.S stock market has produced positive annualized returns in 87%, 95% and 100% of these periods respectively. When I point this out to a client, often I hear “well, yes, but things are different this time because of (insert reason here).”
One of the most powerful arguments for long-term stock investing is to view a graph of the annual returns of the stock market since the early 1900s where major negative events have been entered along a timeline. While the market typically suffers declines following major negative events ranging from a few weeks to several years, the stock market has then recovered and moved on to new highs. This past year was a great example of the resiliency of the U.S. Stock market.
After closing at a new high on February 19th, the stock market, in response to the COVID-19 outbreak, declined 34% as of the close of trading on March 23rd. The stock market then turned around and started rising, making a new record high on August 21st.
I think my colleague Chris Chapman stated it best when, in a response to the concerns of a client about the drop in the stock market this past March, wrote:
“The stock market’s long-term performance is an indicator of humanity’s resilience and capabilities. We have been through many dire times, including economic downturns, amazingly destructive wars, earthquakes, floods, and fires, and have still sprung back after each one. The motives to provide for one’s family and take advantage of opportunities have been prime drivers of recovery, adaptability, inventiveness, and growth.”
Now that does meet my criteria for being profound!
Could the market end up down this year? Yes, after all the stock market has on average been down approximately one out of every four calendar years. Over periods of less than one year the market experiences even more down periods, having averaged three to four declines of between 5 and 10 percent each year. To avoid having to sell stocks during a market downturn, we invest a portion of our clients’ portfolios in low volatility shortterm investments such as money market funds and short-term bonds to cover near-term withdrawal needs. However, when looking at investing for longer periods of time, it is important to remember that “the math favors stock investors.”