Investing is widely considered to be a long-term game. Short-term losses can prick your emotions — no-one likes to see their portfolio go down in value — but staying in the market and resisting the temptation to tinker can pay off in the end.
Here, we look at some of the considerable data that supports the argument for long-term investing. Just remember, past performance is not a guarantee of future performance.
“A 99% chance of positive returns?”
Looking at global stock market data between January 1971 and September 20181, if you had randomly picked one day during this period and chosen to invest just for that one day, you would have had a 51.4% chance of making gains — almost a similar odd to the toss of a coin.
But long-term investing dramatically increases your chances of making positive returns. If you had invested your money for one month during that same period, your chances of making a profit increased to 62.9%. Investing for any one year during that period would have generated a positive return 77.9% of the time, while investing for ten years increased your chances to 98.7%.
Interestingly, an investor that invested in the stock market for more than 11.1 years at any point in time during this period never lost money.
The probability of losing money goes down
The longer you invest, the less likely you are to lose money.
Looking at data from developed equity markets between 1971 and 20182, your chances of suffering a loss go down over time. As shown in the chart below, no matter when you invested during this period, long-term investing dramatically increased your probability of avoiding losses.
Source: Macrobond; MSCI World Equity Mid and MSCI Large Cap Total Return in GBP, 1 January 1971-30 September 2018
But, clearly, the first year can be stressful, because a year in isolation is more likely to show losses than a longer timeframe. This is when anyone new to investing may feel stressed about the ups and downs in financial markets.
The likelihood of making a loss should go down over time, and with it, so can the feelings of anxiety as you become familiar with the natural ebb and flow of market prices.
What might seem like a big sudden movement on day one can appear as a small blip when viewed over the course of several years.
Risk warning
As with all investing, your capital is at risk. The value of your portfolio with Nutmeg can go down as well as up and you may get back less than you invest. Past or future performance indicators are not a reliable indicator of future performance.
Sources
1, 2. Macrobond; MSCI World Equity Mid and Large Cap Total Return in GBP, 1 January 1971-30 September 2018
Pacome Breton
Pacome is an investment manager and head of risk at Nutmeg with more than ten years’ experience in investment and risk management. He previously worked for a US family office and a large European asset manager and started his career at Société Générale in Tokyo. He holds an MSc in quant finance from Bocconi University in Milan and is a certified financial risk manager and chartered alternative investment analyst.
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