With the Coronavirus fears impacting the stock market now is more important than ever to understand the historical ups and downs of the market. Here is a quick quiz and the answers may surprise you.
Are you a confident investor?
You’ve seen the market throughout the years, but how carefully have you watched the overall trends? It’s possible the patterns of growth and loss you perceive don’t mirror what actually happened.
Patrick Moynihan once said, “Everyone is entitled to their own opinion, but not their own facts.” When it comes to investing, facts better inform your decisions, not your feelings.
The purpose of this quiz is for you to think about your opinions and then compare them to the facts. Thinking influences feelings and feelings influence behavior. Fact-based thinking can lead to better decision making. This test is not about right or wrong, but a journey of fact finding.
Before we begin, think about your answers these two key questions:
What is the most desirable outcome for investors?
What is the most likely outcome for investors?
Let’s get started:
We’re going to look at the past 93 years (1925 to 2018), so your answers to the below questions will need to total to 93.
When thinking about the last 93 years of the stock market, how many of those calendar years (January thru December) do you think large cap stocks have been down 12% or more? Put your answer in the “Big Loss” box.
Next “Small Loss”, how many years do your think large-cap stocks have experienced a “Small Loss”, meaning down -0.1% to -11.9%? Put your answer in the “small loss” box.
How about a “small gain”, between +0.1% and +11.9%? This answer goes in the “Small Gain” box.
Finally, enter how many calendar years you think there was a “Big Gain”?
Okay, you may be thinking how does this affect me? We’re getting there and you’ll have to do a little more math. In the probability column you now need to divide your answers to get YOUR estimated probability. As an example, if you entered 30 in the “big loss” category, you would take 30 and divide it by 93 to get a 32% probability of a big loss (30 ÷ 93 =32.25) Do this for each of your answers.
Let’s see how you did. The chart below shows the correct answers, which may surprise you.
Now let’s look at the actual probabilities. How did your answers stack up to the historical facts?
Chances are your guesses don’t match the reality of the Ibbotson SSBI data we used. Seeing the differences in your assumptions to the facts can help you realize how these mistakes can affect your decision making when it comes to investing.
Our experience is many investors over-estimate the “Big Loss” and underestimate the “Big Gains”. We surmise this is because we remember the pain and loss of our investments more than we remember the joy our investment gains give us. In fact, how many times have you been upset your gains didn’t outperform the market? ….some even feel emotional pain even when their performance is really good.
What do these numbers reveal?
51.5% of the time the market is giving us “Big Gains”
73% of the time the large cap stocks have provided positive returns to investors
The market experiences “Big Loss” on 7.5% of the time and losses 27% of the time.
Remember the two questions I asked at the beginning?
Let's go back to the first two questions:
1) What is the most desirable outcome for investors? = Big Gains
2) What is the most likely outcome for investors? = Big Gains
What do you think happens when you buy more large cap stocks during the 27% of the time they are declining?
If you allow your emotions to guide your investment strategy, one behavioral failure could significantly alter your long-term outcome. Hopefully, this quiz helped you build a little emotional stamina and to make more informed decisions when the market gets choppy.