How likely are losses?
On the other hand, behavioral economics tells us that humans tend to fixate on losses more than on gains.
Jane Johnson of Atascadero, Calif., wrote that she and her husband, who are recently retired, have some money to invest for the long term, perhaps for their children’s benefit. But in a phone conversation, she said, “I would hate to put it all in the stock market and see it go down.”
I asked Roger Aliaga-Díaz, chief economist for the Americas and a principal in the Investment Strategy Group at Vanguard, for advice in this kind of situation. “You may want to invest the money gradually, rather than do it all at once.” That practice is known as dollar-cost-averaging, and it is what you do when you invest regularly through a workplace retirement account. “When the stock market falls, you get a better price,” he said. “And, behaviorally, the gradual approach helps a lot of people stay in the market.”
Another way to look at the problem is defensively. What is the probability that you will lose money, based on the history of the U.S. stock market? The flaw in the historical approach is obvious: The future may not resemble the past, and it is definitely not a guarantee of future returns.
That said, I find a degree of solace in these S&P 500 statistics, which go back to 1929. Bank of America compiled them in 2021 to illustrate the perils of moving in and out of the market — what is known in finance as market timing.
From 1929, it found, the likelihood that you would have lost money by investing in the S&P 500 declined as the time horizon grew. On any given day, the index declined 46 percent of the time — just a bit less than you would expect with a flip of a coin. Over one year, though, losses occurred only 26 percent of the time, and that dropped to just 6 percent by 10 years.