“What’s the difference between the Stock market and the casino?”
This is a real question I was asked recently (albeit a bit tongue in cheek). To me, the answer is clear but for someone that doesn’t think about investing as part of their career, it might not be as obvious.
Here’s the most simplistic explanation of the difference:
The longer you stay invested in the stock market, the greater your chance of making money. The longer you stay in the casino, the greater your chance of losing all your money.
It’s certainly not a guarantee that you’d make money in the stock market and lose it all in the casino.* However, provided you invest in the broad stock market**, the data shows the chances of a successful outcome are in your favour.
Why is this?
Stock ownership represents ownership of businesses and gives you claim on the profits those businesses produce over time. When you participate in the market as whole, you’re participating in the profits from a collective group of companies.
While downturns in the market do happen, history tells us that with time, markets continue to increase. Setting up your portfolio appropriately will allow you to weather storms and capture the returns of markets over time.
The Stats and Odds
The historical returns of the Canadian stock market show that you have a 74% chance of a positive return over 1000+ random rolling 1-year periods.
What are rolling periods? Selecting a date in time and measuring the return starting from that point in time, usually the beginning of a month. For example, the one-year rolling return would be calculated from Jan. 1, 2011 through Dec. 31, 2011, Feb. 1, 2011 through Jan. 31, 2012, Mar. 1, 2011 through Feb. 29, 2012, and so on and so forth. Source: The Big Picture.
Over 985 3-year rolling periods you were break-even or above 87% of the time in Canada.
When stretched to 10-year rolling periods, as measured over 900 measurable periods, you would have NEVER had negative returns in the Canadian stock market.***
In US stocks, Over 900 10-year rolling periods, 95% of the time had positive returns, and 100% over 781 20-year rolling periods measured. Source: The Big Picture.
It’s hard to imagine the US or Canadian Stock market being lower in 2041 than it is today. For the long-term investor, knowing this history can help you stay the course when markets are experiencing significant downturns.
It can be easy to get caught up in the noise of daily financial news, stressing over every dip, but the reality is that staying the course, according to academic research, is almost always your best option.
So in short, is the stock market just the casino? Definitely not.
Disclaimers:
*Casino refers to games of chance, i.e. slots, roulette, craps, etc, where there is statistical probability against you winning. Slot machine odds are some of the worst, ranging from one in 5,000 to one in ~34 million chance of winning the top prize when using the maximum coin play. Source: Investopedia
**In this case, the broad stock market in the US represents the S&P500 Total return index and in Canada, the S&P/TSX Composite Total Return Index.
***Past returns are not indicative of future returns. Risk capacity and risk tolerance need to be assessed for each investor. This blog post is meant as general information and not specific investment advice.
WHAT I’M READING LATELY:
Why I’ll Always Be Optimistic About The Stock Market
David Booth is Executive Chairman and Founder of Dimensional Fund Advisors. “New businesses will grow. Old ones will adapt. Some will fail, while others flourish. Rather than having to guess what will happen to whom and when, I choose a different path. I invest in the market.” I’ve explained my philosophy about markets in different ways, but what all these descriptions have in common is choosing to side with human ingenuity rather than against it. Betting against the market is exhausting, and we believe that it doesn’t pay.”
The Surprising Dividends Of Transformed Investing
Dave Goetsch is a TV sitcom writer. In this short article, he speaks candidly about his experience in the stock market as a non-professional investor. His career of working in a highly unpredictable industry has given him several key insights into investing.
Safe Haven: Investing for Financial Storms by Mark Spitznagel
Mark Spitznagel, author of the popular book The Dao of Capital and Founder of the hedge fund Universa Investments, writes about the use of safe havens to protect large investment portfolios.
He discusses impossible-to-forecast market surprises and how to prevent significant losses during these periods using safe havens, a type of investment that is expected to retain or increase in value during times of market turbulence.
These could include insurance, bonds, or precious metals, among other options. It’s an interesting read, just not for the novice. It also includes a forward from Nassim Nicholas Taleb, for any fans of Black Swan or Fooled by Randomness.