Predicting The Stock Market
Where will the stock market be six months from now?
I recently got asked for my prediction on where the stock market is going over the next six months. Here’s what I said:
I’m going to be honest.
Like everyone else, I have no idea where the market will be six months from now and anyone who tells you otherwise, is either lying to you or lying to themselves.
Sure, it’s easy to speculate. I could come up with a fancy sounding bull case or bear case and argue passionately about why my prediction is correct. And sometimes, it’s fun to do that.
But that’s not particularly helpful. In volatile times like these, it can be scary to be an investor, and I think what would be most useful for people wondering what’s going to happen to the market going forward—whether it’s 6 months, 12 months or longer— is to understand history and probabilities.
The key thing to understand is that historically, the longer you’ve been invested in the market, the higher the probability that you are up on your investment.
Think about this: what are the chances the market is up tomorrow? If you look back throughout the history of the U.S. stock market, you’ll see that the market has been up 53% of the time on any given day.
That makes sense, right? Where the market goes day to day is almost a coin toss, but there is an upward bias in the market as companies grow and generate more profits over time.
As you extend your holding period, the chances that the market is higher continue to go up. If you hold for a month, the chance of seeing a positive return is 63%; after a quarter, it’s 69% and after a year, it’s 75%.
The probabilities keep going up if you hold for multiple years, reaching 94% for a 10-year holding period and 100% for a 20-year holding period.
In fact, if you look at the data, there’s never been a negative return for the stock market in any 16-year holding period or longer.
So instead of thinking about the market in terms of certainties, think about it in terms of probabilities, knowing that those probabilities work in your favor the longer you invest.
Of course, all of this assumes that you believe that the market going forward will act similarly to how it has in the past—that long-term, the U.S. economy will continue to grow at a solid pace and by extension, so will U.S. corporate profits.
If you believe that, like I do, then these probabilities should give you confidence no matter what happens in the market short-term.
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