Slump, Buy Then, & Fair Risk
Key Takeaways
Pessimistic headlines abound with the seasonal market slump, but hang on to those itchy fingers and consider larger market movements before making hasty decisions.
If we can learn anything from world renowned tennis player Roger Federer, who in his entire award-winning career won only 54% of the competitive points he played, it is that being above average consistently will lead to excellence.
In the global stock market, your percentage of positive daily returns is that exact number, 54%. Positive yearly returns, 74%. Positive 15-year rolling periods, 100%.
A cynic is a man who knows the price of everything but the value of nothing.
Oscar Wilde
After touching record highs recently, stocks have slumped and investors have been confronted with worrisome headlines in the news;
2 charts show why the stock market sell-off isn't done yet
— Yahoo FinanceStock markets tumble amid jitters over tech companies’ growth
— GuardianAI fever cools, wiping out $1.3 trillion on Nasdaq, with Tesla, Alphabet and more sinking
— Straits Times
Popular technology stocks (part of the Magnificent 7) that have been attracting investor’s interest since the end of 2023 have fallen double digit figures from their highs over the past couple of weeks, as the diagram below shows.
Do large losses in a handful of popular stocks signal a downturn ahead for the broad market?
Is the rise in the popularity of Trump leading to further declines in markets?
What if the ongoing geopolitical conflicts spread and lead to further volatility?
Invariably, the question behind those thoughts are, “Should I be doing something different with my investments?” This is just another version of a market timing question wrapped in a different format.
Should I sell my risky assets and wait for a more favourable outlook to buy them back? More precisely, can we find clear trading rules that will tell us when to buy or hold stocks, when to sell, when to admit our mistakes, and so on?
The lure of successful trading strategies is seductive. If we could find them, our portfolios would do so much better. Before we think of being a little more active in trading, consider the following piece of research in the graphic below.
If you are looking to make some quick and easy money — perhaps you should consider the casino instead. Note that we are not promoting gambling, but the odds there do admittedly look better.
Being Above Average Consistently Leads to Excellence
Thinking about investing for the long-term can be difficult. But some insights can be gleaned from Roger Federer’s 2024 commencement address to graduates of Dartmouth College.
No one can dispute that Federer was one of the best tennis players of recent times, with 20 grand slams and 83 other titles. He noted that out of the 1,526 matches that he played, he won an astonishing 81% of them. However, out of all the points in those matches, he only won 54% of them.
How is that possible? How does barely doing above average (just making it past the 50% mark) in points lead to so many victories? It was likely that the small advantages in his points led to some sort of a compounding effect that helped him win over the longer term.
Do you know what has very similar reward system metric? Yes you’ve guessed it — it is the stock market — and a globally diversified stock investment at that.
You will notice that your win rate for daily returns are no better than a coin toss — and very much like Federer’s individual point wins. But the moment you hold on for a longer period of time, the number of positive returns you receive increases. When you are looking at rolling 15-year periods or more, there are currently no negative periods — meaning that your success rate is 100%.
So if you are currently not in the positive percentage segment of the investing statistic, fret not. Like Federer, you should not give up anytime you lose a point or in this case, suffer a short-term loss. Looking short-term means you are a trader and not an investor, and we know how bad those odds are.
Your small advantage from holding a good investment will compound well over the long term.
If you would like to find out more about long-term outcomes for your portfolios, come and chat with us.
