Expert knowledge combining financial science with real world applications.

Odds of Winning in the US Equity Market

January 10, 2018

Picking an entry point to the equity market is always difficult. Rarely does intuition tell you that market levels are attractive. When the market is rallying, frequently the thought is to buy on a pull back, and, when declining or in a bear market, the feeling is that it will continue to drop.  In fact, it is often said that the equity market is one of the few markets where people run away when prices drop or go on sale.

Timing the market has proven to be exceptionally difficult, and endless studies have borne that out. Behavioral finance has demonstrated extensively that investors’ performance is severely hampered due to chasing returns, market-timing and inadequate diversification, among other human errors. The money-weighted return of investors verifies that most consistently underperform the market. In 2015, the 20-year annualized S&P 500 return was 8.19%, while the 20-year annualized return for the average equity mutual fund investor was only 4.67%, a gap of 3.52%, primarily due to market timing.i

Buy and hold, and suffering through the declines knowing that the long-term averages favor positive returns, has been what rewards investors over time. One does not earn excess returns without taking risk. So, what are the odds of a positive total return in a buy and hold strategy over different time frames? Versatile looked at trailing monthly returns for 1 through 12-year periods beginning in December 1950 through December 2015 (780 observations each). The results are as follows:ii


As the holding period lengthens the chance of a negative real return shrinks dramatically. By year 6 it has decreased to 2.4% and then converges to almost a 0% chance in year 12. Below is a graph of the 6-year rolling monthly returns for the past 65 years.iii


Unsurprisingly, the evidence indicates that the longer you are in the market the better your chances of having a positive return. The table and graph visually depict a very low probability of earning a negative total return once the time period exceeds 5 years.
In the end, what does not work? What hurts your returns? What decreases your odds of investment success?

  • Market Timing
  • High Fees
  • Taxes
  • Lack of a disciplined process

What increases your chances of investment success?

  • Focus on the long-term and stay invested
  • Reduce costs – fees, taxes, trading
  • Diversify by geography and market sector
  • Stick to a disciplined plan

Versatile helps with the latter through intelligent diversification, low costs and a plan that increases your odds of investment success. Rather than listening to the noise of Wall Street, Versatile relies on evidence-based investing. Wall Street distracts with the goal of maximizing their fees.

Versatile can say with confidence which path you should follow to increase your probability of investment success. Investors should stay committed to a disciplined investment strategy, understanding that they increase the odds of positive returns versus the flawed strategy of attempting to time the markets.

i Source Dalbar 2015 Quantitative Analysis of Investor Behavior
ii Source: Dimensional Returns
iii Source: Dimensional Returns

Investment Advisory services are offered through Versatile Capital Management, LLC, a Registered Investment Advisor.
This newsletter contains general information that may not be suitable for everyone. The information contained herein should not be construed as personalized investment advice. Past performance is no guarantee of future results. There is no guarantee that the views and opinions expressed in this newsletter will come to pass. Investing in the stock market involves gains and losses and may not be suitable for all investors. Information presented herein is subject to change without notice and should not be considered as a solicitation to buy or sell any security.

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