Investing With Confidence, Know Your Odds

For the average retail investor, trying to understand the financial markets can be extremely overwhelming but it should not be. The first thing that any investor should understand about financial market commentary distributed through any form of media is that it is often not relevant to most personal situations. The only use for such information is to gain a better understanding of why your investment portfolio’s value has been changing day to day, beyond this, you can view it as pure entertainment. Unfortunately, most retail investors get a steady and consistent flow of financial information they do not understand.

So, what should the average retail investor be concerned about? Your primary goal should be to protect, preserve, and grow your assets. As a retail investor, your primary means of creating wealth should be a basic combination of stocks and bonds unless you have an actual method of using other investment vehicles which prove to be more effective. However, for most investors, it is not likely to be the case. We understand that there are other ways to invest that seem to be popular, but they are likely to be inappropriate for protecting, preserving, and growing your assets. It is best to keep things clean and simple as this approach would minimize costs, maximize your returns, and make your tax situation less complicated if you are investing outside of a retirement account.

What if you knew the odds of making a profit and what that profit is likely to be by investing over a specific period of time? Armed with this knowledge you should feel more at ease whether the financial markets are volatile or calm. For certain asset classes that have a sufficient history this information would allow you to determine your probability for success. As such, we have created a table for stocks and bonds to give you basic insight into your odds when investing over a specific timeframe with a single one-time investment. Based on experience, we know that retail investors are not confident and do not trust putting their money to work in the financial markets. However, that is because they do not understand that the market favors the long-term investor and is not so forgiving for the short-term investor without an adequate plan. Let us take a look at the two tables below.

There is powerful information above but do not let it overwhelm you. Consider the first line in the first table which shows you your odds of losing money invested over a 30-year period and what your investment return is likely to be. The minimum period return of 8.47% reflects the worst return. The other two returns in the same row reflect the average and highest return over any 30-year period in the last 96 years. Let us evaluate your understanding. If someone were to give a 20-year-old $500, 000 today to invest for 30 years, where would you recommend that he or she invest based on the two tables above?

How about an allocation of 50 percent stocks and 50% bonds? Wrong answer, although this allocation might give an investor a sense of joy over the years as the 50/50 allocation between stocks and bonds might give you a less bumpy ride, the investor would have significantly less money in 30 years. The correct answer is to put 100% of the investment into the stock market using an S&P 500 index. At the end of the 30-year period, the investor would have between $5,731,380 and $23,851,305 with the average return to the investor being $10,902,205. No one can predict the future, but an investor can rest assured that he or she has made the right decision using the tables above. In our example, there is a 50% chance that the investor will have about $10 million at the end of the 30-year period and over a 90% chance of having more than $5 million after 30 years.

No matter what your investment time horizon, or how often you want to invest, you can use similar calculations to put the odds in your favor. This applies whether you are close to retirement, retired, investing monthly, or whatever the situation, you can stack the odds in your favor and not be concerned about market volatility. Tune out the financial market pundits and enjoy something other than financial news unless you find it entertaining.

At Investoristics, we build investment portfolios that stack the odds in your favor by creating portfolios based on solid investment fundamentals. Using our Investoristics 10 equity portfolio as an S&P 500 replacement will give you even better odds with significantly higher returns and lower risks. Consider joining “The Collective” or plan your investment future with whatever equity approach you are comfortable with but if your odds of success are lower than those in the tables above, you might want to go back and rethink your approach.