Murphy's Law and the Markets

You  might feel like it's "Murphy's Law," or that whatever can go wrong, will go wrong. For example, if you invest in stocks then the market is likely to decline shortly thereafter. And you may look at that long-term graph of investment returns and say something like, "But that's the past. What about my future?

When looking into the future we don't know what the market will do, so we invest in a way that gives us the best chance of success. Like picking a chocolate from a box, we may pull out a winner or pull out something distasteful. Historical performance shows that most of the years are winners. In fact, the size of the winners is significantly larger than the size of the losses; so keep on investing, year after year. 

 

  

What will next year bring for the stock market? The chart above shows that two out of three years are positive and that year's return is historically much larger than are the losses in a bad year. (10) Take this to heart, statisticians call this a positive skew-the odds favor the investor.

 

Since the 1920's, the stock market has had approximately two good years for every negative year, and the gains from the good years were significantly larger than the losses. If you could flip a coin, knowing that 2/3 times heads would win, you would want to bet on the heads. The same is true with stocks: the odds significantly favor the long-term stock market investor.

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