Investors’ Odds Improve if They Give the Market Time

by Dan Wiener | October 4, 2011 6:00 am

Risk vs. Reward[1]In a nutshell, the data is holding up better than the sentiment.

Whether it’s the numbers on rail and boat shipments, tax revenues, durable goods orders and shipments or auto sales, there’s plenty in the U.S. economy that points to continued growth — albeit slower growth than we’d like, of course. Last week’s update on Q2 GDP was an improvement as well. I’ve seen some estimates that third-quarter GDP is going to come in with better than 2% growth.

Don’t get me wrong — 2% growth is not going to produce lots of new jobs, nor is it going to magically repair the housing market. But it isn’t a recession, either.

What’s holding us back is the fact that consumer, investor and business sentiment stinks. So does voter sentiment, for that matter. For the past week or so it’s been Europe’s bailout plans that have been front-and-center. A month or so ago it was the debt-ceiling debate here at home. Tomorrow? I’m confident there are plenty of “issues” that will stall the market, or cause investors to fret, or spark more screaming from politicians on all sides of the aisle, none of whom really seems to have the nation’s interests at heart, or at least as high on their list as their own election, or re-election prospects.

But as we close out the quarter, it’s important to remind myself that I’m not investing in sentiment, I’m investing in companies.

I’m sure that as you watch the market’s moves — on Monday, the Dow Jones went from a loss of 90 points to a gain of 60 points, back to a loss of 90 points, up to a slight gain and finished with a nosedive of 260 points — you’ve got to wonder whether having a long-term view makes sense when the day-to-day is so volatile.

In fact, some recent research conducted by Jeff DeMaso, one of my analysts, shows the odds of making money in the stock market severely outweigh the odds that you won’t. But don’t try to day trade. Jeff looked at every day’s stock market return from 1927 through the end of 2010.

He found that the chance that you’ll lose money investing for one day is 46% — not quite 50/50. Invest for one week and your odds of losing money decline to just 44%. Invest for 12 months and the odds of a loss drop to 33%, and if you invest over three years, the possibility that you won’t make money goes to 24%. That means there’s a 76% chance you will make money. Take a 10-year perspective and, well, there’s an 87% chance you’ll make money. Actually, the chances for making money are higher than these calculations because Jeff only looked at index returns and didn’t factor in dividends.

In any case, given the fact that the odds are well on our side of the fence, I’ll leave the day trading and attempts at timing the market to the hedge funds and others who think they’ve got a magic formula but have so far proved the only formula they have is for minting fees for the partners while their investors are left holding the bag.

  1. [Image]:

Source URL:
Short URL: