Most investment decisions based on short-term timing, including moving a portfolio to cash, are speculative in nature. However, for long-term investors where the goal is growth, staying fully invested is often the right course of action. While less reliable over days or months, simply staying invested in stocks over a few years dramatically improves the likelihood of a successful outcome.
FREQUENCY OF POSITIVE STOCK MARKET RETURNS OVER DIFFERENT PERIODS (1927 – 2020)
Performance used to calculate frequency of positive returns includes reinvestment of dividends and are compounded by geometrically linking monthly returns.
Source: Fama-French Market Return Series, January 1, 1927 – December 31, 2020
The graphic above highlights the percentage of time that stock market returns are positive for a range of rolling investment periods from 1927 through 2020. As you can see, the longer the holding period, the more likely it is to be positive. There are no holding periods longer than 15 years that result in a negative stock market return.
Trying to react and profit from short-term conditions are the hallmarks of traders and speculators. Getting in and out of the market often leads to significant underperformance because it requires impeccable timing on both exit and reentry decisions. It also requires the emotional fortitude to sell when everything seems fine and buy when the markets are in turmoil. These behaviors are not only at odds with our nature, but they are also at odds with what it takes to be a successful investor, namely patience and discipline.
For long-term investors, the most likely way to succeed is to invest based on probabilities while driving emotion and speculation out of the equation. Investors think in terms of years and decades, not days or months. Simply staying invested through all kinds of market conditions often delivers the best results.
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