Everyone dreams of an investment process that puts you in the market when it’s going up and gets you out right before it goes down. However, much like Oz was for Dorothy, such an investment process is just a beautiful dream.
In reality, you should view the stock market more like going to a casino. In casino gambling, the bettor is playing against “the house.” The casino has a number of built-in advantages that ensure it will come out a winner in the end. These advantages are also known as the ‘house edge,’ which represents the average gross profit the casino expects from each game. The more gambling that occurs, the greater the odds are that the result of play will match up with the house edge—and that the bettor will lose money.
As an investor, you have the ability to play with house edge—the key factor here is time. Focus on time in the market not ‘timing the market,’ because when it comes to investing, what is the biggest risk of all? Market risk? Company risk? Other economic risks? For the majority of investors, the biggest risk is simple; it’s the risk of losing money.
Below is an illustration of the performance of a $10,000 investment in the S&P 500 for the past four decades. Notice how the growth of a $10,000 investment shrinks from $659,591 to $318,071 just by missing 10 days. Over the course of 39 years, missing 10 days is less than 0.00071% of the total duration. However, it cuts your return over 39 years by more than 50%.
Source: Bloomberg as of 12/31/2018
By maintaining investment exposure in the market, one reduces his/her overall risk. An investor’s odds move from bettor-like to house edge by simply maintaining that market exposure. Casinos are fully aware of this concept; they have no windows or clocks, and they provide “free” food and drinks. All efforts go toward making bettors stay in the casino. You have the luxury of not having to pay for someone’s dinner to keep the investing going. Next time you wonder if you should sell, doing nothing may be the best action of all.