We've all heard that time in the market reduces risk, but I haven't seen it quantified. I decided to address this question in more detail. I compared holding times of S&P for 1, 5, 10, 20, and 40 years, since 1871, to that of a Risk Free return for the same periods.
See https://docs.google.com/spreadsheets/d/1ax9Q-ylNtxMacdM_YRgqg4h_tRPJskgTvJvTaldDdFE/edit?usp=sharing for charts and calculations.
Results
All returns are in real dollars.
Mean is the annualized average return.
Deviation is the standard deviation of the return.
Win Rate is what percent of the time the S&P return is better than the risk free return (or vice versa).
| Condition | Mean (%) | Deviation (%) | Win Rate (%) |
|---|---|---|---|
| S&P 1 Year | 8.36 | 19.46 | 64.42 |
| S&P 5 Year | 7.04 | 7.99 | 71.63 |
| S&P 10 Year | 6.83 | 5.12 | 83.21 |
| S&P 20 Year | 6.64 | 2.96 | 97.75 |
| S&P 40 Year | 6.49 | 1.37 | 100.00 |
| Risk Free 1 Year | 2.20 | 5.37 | 35.58 |
| Risk Free 5 Year | 2.16 | 3.18 | 28.37 |
| Risk Free 10 Year | 2.31 | 2.65 | 16.79 |
| Risk Free 20 Year | 2.18 | 1.87 | 2.25 |
| Risk Free 40 year | 1.88 | 0.97 | 0.00 |
Conclusions
- If you need the money in 1 year, stocks are gambling; 5 years, questionable; 10 years, okay; 20+ years, safe.
- Return has been remarkably stable over the last 150 years. Recent returns are pretty similar to returns from 100+ years ago.
- On long timescales, things like the Depression and Great Recession are barely visible.
Warnings
- This analysis is extremely backward looking. It should not be used to say whether the market is over or under priced today.
- I don't take into account taxes or other transaction costs.
- For the risk free rate, I assumed that an investor could get the 10-year US treasury rate, and that his investment return would update monthly. This sort of instrument did not exist until very recently (US Treasury Floating Rate Notes), so the risk free rate and return I give should be seen as an approximation.
- I used 10-year treasuries and the S&P as my benchmarks because they are both available all the way back to 1871, not because I think they are optimal investments.
Submitted July 15, 2020 at 08:37PM by Kaawumba https://ift.tt/2DDlYpZ
