Itâ€™s worth remembering that the markets are relatively unpredictable in the short term. As such we believe day to day market performance is extremely hard to predict. However, for the longer term, such as over years or decades, our historical analysis suggests that markets are likely to deliver a positive performance. On any given day, the chance of the US market rising or falling is close to 50/50, essentially a coin toss. But over a decade, the US market has risen 93% of the time. This data is based on our analysis of the S&P 500â€™s daily performance from 1950 to 2014.
We believe one of the reasons for this is that a very small bias to positive performance on a daily basis adds up over time due to the effects of compounding. Using history as a precedent, the chance of the market rising on any given day is 53%. However, even that 3% advantage over a 50/50 outcome has added up to impressive historical performance for stocks.
Though our analysis shows there is only a slight chance of the markets coming out ahead each day, statistically speaking, when you apply this probability across hundreds of days, the skew to positive outcomes becomes much greater. On the other hand the small bias to positive performance over the shorter term and can easily be overwhelmed by the volatility of the markets. This is one reason why we believe a portfolio weighted to stocks is prudent for investors with long term goals such as retirement.