Market Probabilities With Mark Biller

Show Notes

Ecclesiastes 7:8 encourages us to be patient in trials of all kinds, including our investments. If patience is a virtue, how do we apply that to our portfolios? We’ll talk about it with investing expert Mark Biller. 

• Mark Biller is executive editor at Sound Mind Investing.
• If you’re feeling despondent about the losses suffered over the past year, be encouraged! 
• PATIENCE IS A VIRTUE
• Biller reminds us that time is on the side of the long-term investor. This has always been the case — it was true after the dreadful losses of 2008’s Financial Crisis, it was true after the Covid shock in 2020, and it’s still true after last year’s losses, whether or not this bear market is over yet.
• The U.S. stock market has been remarkably resilient. A portfolio divided 50-50 between large and small company stocks has returned about +11% per year over the last 95 years. Think about everything the market has been through since then — the Great Depression, a World War, and so on.
• Admittedly, that average obscures some wild rides along the way. 
• There have been 12-month periods where losses were as horrifying as -69% and gains were as breathtaking as 240% (those two extremes actually happened back-to-back in 1932-1933). In fact, it’s been very uncommon for stocks to actually return close to that  +11% average in any particular year — only about 5% of all the 12-month rolling periods over the last century or so have been within one percent of that 11% long-term average.
• What that means is that it’s perfectly normal for the stock market’s returns to be all over the place from year to year. And yet, despite that, time is on the side of the long-term investor. The longer you’re willing to keep your money in the market, the greater your  likelihood of success.
• Biller writes about all this in a recent article at SoundMindInvesting.org, titled “Market Probabilities: What the Past Suggests About the Future.” It features a chart that shows that if you had randomly picked any 12-month period between 1926 and 2022 to own stocks, you would have had a 74% chance of making money.
   

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• How much money? The table shows you would have had about a 39% probability of making more than 20%, a 20% chance of making between 10% and 20%, and a 15% chance of earning between 1% and 10%.
• The chart shows these types of probabilities for holding periods of 1-year, 2-years — all the way out to 10-year holding periods. And that’s where the numbers are really so reassuring.
• When you get out to five-year holding periods, losses occurred only 11% of the time. In other words, if you held your stocks for at least five years, the likelihood of making money increased to 89%.
• The chart also shows that as the holding period lengthens, the very large gains and losses gradually disappear as the market moves closer to its long-term historical average. And by the time you reach holding periods of 8-to-10 years, the likelihood of losing money falls to just 2%-3% of the time.
• Now, this assumes certain things, like your portfolio being properly diversified.
• This study reinforces the importance of diversification. The article notes that the S&P 500 Index, which is really a measure of large-company stock performance, was negative -1.4% for the 10-year period ending in 2008. But when we diversify that portfolio by splitting it evenly between large and small company stocks, that 10-year loss flips to a small gain of +2.7%.
• One of the main points of this article and the chart is to show how volatile stock market returns are over the short-term, and how that volatility rapidly diminishes as you stretch out your time horizon. Short-term returns are very unpredictable, but they become much more predictable the longer the time horizon extends. That’s why SMI has always recommended at least a five-year time frame as a minimum for investing in the stock market, and 10 years is really what they prefer to see. You can’t guarantee that a person will have a positive return investing in stocks over any given five or 10-year period, but historically, the odds of success go way up with those longer periods.
• And again, it’s reassuring that even the worst recent 10-year period — that 1999 to 2008 period that ended with the Global Financial Crisis — still provided modest gains for diversified investors.
• DON’T TRY TO TIME THE MARKET ON YOUR OWN
• All of the research suggests that most individual investors do a poor job of trying to time the market on their own. And most who try to do that, end up hurting their long-term results.
• So for someone who is NOT following along with a very disciplined, mechanical strategy like they’re using at SMI, but has a 5-year time horizon and is contributing every month to their 401k, they should stick with simple dollar cost averaging. They should probably just keep making those contributions and count on the market to bounce back from any further damage that might be in store before they reach the end of their 5-year time period. This article we’ve been discussing today says that historically a person has an 89% chance of making money in stocks over a 5-year time period. That’s the argument for continuing to dollar-cost-average right through a bear market like this.
• SEEKING A FINANCIAL ADVISER
• What kind of person needs a financial advisor?
• Biller says there are two main groups:  one is the person who doesn’t enjoy financial stuff and doesn’t want to do this on their own. Chances are, that type of person isn’t going to do a particularly good job with it because they don’t like it and it’s a chore. So that’s one good reason to offload it to an advisor.
• The second is a little less obvious, but it’s a primary reason why many of SMI’s do-it-yourself newsletter people eventually transition over to using SMI’s Advisory service, and that’s because they want to ensure their spouse is well cared for after they’re gone. Many people tell SMI they don’t mind handling their own investing, but their spouse would be lost because they haven’t been involved. So they’ll come over to work with an SMI advisor to make sure the transition is smooth for their spouse’s benefit.
• And of course, we regularly recommend you seek out a Certified Kingdom Advisor if you need help with your investments. You should interview two or three of them, and you can start that process by visiting FaithFi.com/find. 

On this program, Rob also answers listener questions: 

• What is the best way to select a lender for a home refinance? 
• What kinds of retirement income are taxable? 
• When does it make sense to refinance an auto loan? 

RESOURCES MENTIONED:

• CreditKarma
• LendingTree

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