How You Can Reduce Your Chances Of Making Losses In The Stock Market

Probability of negative S&P 500 returns over different time horizons

The chart above appeared in a recent Wall Street Journal article. It uses data stretching from 1929 to June 2016 and it shows the historical probability of the S&P 500 index giving a negative return to investors depending on the holding period. The S&P 500 is a widely used barometer for the US stock market.

For example, if an investor had held the S&P 500 for just one day, he would have a 46% chance of making a loss. A one year holding period will result in a 27% chance for the investor to lose money. For a 10 year holding period, the odds of sitting on a negative return with the S&P 500 have historically fallen to 6%.

As you can see in the chart, the longer an investor has held onto the S&P 500, the lower his odds of losing money. This is actually very similar to what happens in the stock market in Singapore too.

The chart you see below is prepared by my colleague Chong Ser Jing. It shows the odds of our local market barometer, the Straits Times Index (SGX: ^STI), making a loss for different holding periods. There are some caveats to note: Ser Jing’s data set is smaller (but it still stretches over nearly 23 years from May 1992 to January 2016) and does not take into account both dividends and inflation.

With that, here’s the chart:
Straits Times Index's odds of making losses from May 1992 to January 2016
Source: S&P Global Market Intelligence

You can see a very similar pattern when Ser Jing’s chart is compared to the one from the Wall Street Journal. Historically, the Straits Times Index has delivered a loss 48% of the time if an investor has a holding period of just one day. That’s akin to a coin flip. If the holding period is stretched to five years, then the odds of making a loss fall to 41%. Stretch the holding period even further to 10 years, and the odds fall to just 17%.

Buying and holding stocks for the long-term has historically been shown to have dramatically reduced the chances for an investor to suffer a loss. But that said, buy-and-hold investing may not work with every company. Companies with lousy businesses may see their share prices fall steadily over time and no amount of patience may change the course – when it comes to individual stocks, it may be important to be selective.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Lawrence Nga doesn’t own shares in any companies mentioned.