You might get lucky a few times, but the more you play, the greater your chances of losing.
In contrast, when it comes to investing in the sharemarket, the longer you stay, the better your odds of success.
Looking back at historical daily returns for the S&P 500 in the US, the index has been up 52 per cent of the time.
That’s better than even, but only just. If you want to know what the market is going to do on any given day, you may as well flip a coin.
If we increase our holding period from daily to monthly, the probability jumps to 59 per cent, which still isn’t particularly compelling.
However, when we look at rolling 12-month blocks, the likelihood of a positive return shoots up to 73 per cent.
That’s based on monthly returns data going back to 1900 for that, so it’s a sample size that includes plenty of recessions and rough periods.
One year is still far too short to be considered the timeframe of a long-term investor, but things start to get interesting when we consider holding periods of five years or more.
The historical likelihood of a positive return improves to 89 per cent, before increasing to 97 per cent over 10-year blocks.
If you spent a decade in a casino, I’m not sure you’d have much chance of coming out with anything, let alone better off.
The 3 per cent of occasions when an investor would’ve experienced a loss when holding over 10 years relate to two periods in history.
One is if you had bought US shares near the end of the 1920s, which preceded the Great Depression.
The other would be if you made your investment in the late 1990s, at the peak of the dot-com boom, before the recession and associated tumble in share prices.
Those were unique and rare periods, which we’ve only seen twice in the past 120-odd years, but they can happen.
When we extend the holding period to 15 years or more, the proportion of positive returns increases to 100 per cent.
It’s a remarkably similar story in New Zealand when looking back at returns from our sharemarket indices going back to the 1960s.
For all the possible five-year holding periods, returns were positive 87 per cent of the time, increasing to 100 per cent for rolling 10-year blocks.
The long-term returns from both US and New Zealand shares have been impressive at 9.7 and 9.4 per cent per annum respectively (including dividends).
These returns can be volatile, and depending on where markets were at when you started, you might even find yourself sitting on losses for an extended period.
However, the longer your investment time horizon, the more the odds swing into your favour.
The sharemarket is nothing like a casino. It rewards patience and gives back in spades to those who stick around long enough to reap the benefits.
Mark Lister is investment director at Craigs Investment Partners. The information in this article is provided for information only, is intended to be general in nature, and does not take into account your financial situation, objectives, goals, or risk tolerance. Before making any investment decision, Craigs Investment Partners recommends you contact an investment adviser.
