Odds are in Your Favor
The average draw down during a calendar year is 14.4% (A). This is normal. Give that pause.
In 2013, the drawdown was 5.8% (A). This year, the drawdown is of similar size; that is to say, a mere third of its normal (scary) size.
We have not had a normal year in some time. I am not saying that we deserve a correction--that would be too easy--I'm not saying sit on the sidelines and count your chickens. That's what you're likely to hear from a television talking head or read from an internet investment guru. I'm saying...
I'm saying that I can accurately tell you the past.
No one can accurately tell you the future. And I'd appreciate it if the rest of my colleagues would admit as much so that we can get on with the vastly more important business of planning our investments in alignment with our goals, values and relationships.
Let's take a walk to the casino. This time, though, you get to be the house. You own the casino. Imagine the odds are tipped in your favor. 53% of the days, you win. 47% of the days you lose. How many days are you going to stay open?
As many days as possible, is the answer the wealthy person will give! If, in fact, you are a casino owner, these odds are not too disimilar from a very positively-tilted slot machine. But your odds are better than that. In fact, the longer you stay open, the more money you make.
59% of the months you stay open, you will make money. Again, how many months will you stay open? As many as possible. Do you shut your doors because the past few months have "been hot" and you're due for a "correction?" Of course not! You're in the business of making money. And the longer you stay open, the more money you make.
67% of the years you stay open, you make money. This is a staggering statistic. Two out of three years you make money. One out of three years you do not make money. And the amount of money you make is statistically, significantly larger than the amount you lose in the down years.
As an investor in the stock market, the odds are tilted in your favor: You make money 53% of the days, 59% of the months and 67% of the years (A).
A - JP Morgan Investing with Composure in Volatile Markets
By James C. Liu, CFA and Brandon D. Odenat, June 2014.