By: Jack Strada – KOM Financial Planning
If I offered you a game of chance, where 75% of the time you would win and 25% of the time you would lose, would you play? Most people would. Thought of as another way, if a Las Vegas casino offered people 75% odds of winning, they would go bankrupt in a hurry.
Is investing like gambling? Not if you focus on what you can control and think long-term. Below is a histogram of annual US stock returns from 1926-2014:
Source: Dimensional Funds. CRSP data provided by the Center for Research in Security Prices, University of Chicago. The CRSP 1-10 Index measures the performance of the total US stock market, which it defines as the aggregate capitalization of all securities listed on the NYSE, AMEX, and NASDAQ exchanges. Indices are not available for direct investment; therefore, their performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is not a guarantee of future results.
If you invest in a US stock market index, and hold it for the long-term, you should see similar results. This is why I encourage my clients to hold at least a portion of their savings in a stock market fund. Buy and hold for the long-term, and don’t panic when the market has a bad year, or years. Historically, this has proven the best way to grow your wealth at a rate greater than inflation.
Let the markets work for you: use history to guide your decisions, keep your costs low, diversify broadly, and stay disciplined. If you need help to get started, or need a steady hand to guide you, please contact me.