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How much do the odds move in your favour over time in the equity market? Find out today.

Market Activity

How much do the odds move in your favour over time in the equity market? Find out today.

TPP expert insight

January 23, 2025

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Long-term Investing

The odds of profiting from investing in an equity index increase over time.

Paul Hickey, a founder of Bespoke Investment Group, compared the yearly Wall Street predictions and actual market results starting with the forecast for Dec. 31, 2000.

He found that the Wall Street consensus only ever predicted gains, every single year, of about 8.8% on average. Of course, there were big losses in some years, as well as larger-than-expected rallies in others, so the variance between actual annual performance and the prediction was huge — an average gap of 14.2 percentage points.

Being wrong by that much means that these forecasts weren’t merely inaccurate. They were completely out of bounds. The amazing thing, with a record like this, is that the strategists keep trying.

The S&P 500 declined in seven of the 25 calendar years in Mr Hickey’s tally. Yet in that period, the Wall Street consensus never predicted an annual stock market decline. The most likely reason for this constant optimism is that the investment houses that employ them, favour a bullish outlook. Publicly, they tend to say that the positive predictions are simply the results of their “models” for the markets.

Whatever the reason, a credulous investor expecting gains every year would have been disappointed: In the 12 months of 2022, for example, the S&P 500 fell 19.4%; in the recession year of 2008, it plummeted 38.5%.

After the terrible year of 2022, when Godman Sachs predicted a rise of 10%, Wells Fargo predicted between 10% and 14% and Margan Stanley saw an 8% rise, the strategists became more cautious. For 2023, the experts forecast a gain of 6.2 percent and then for 2024 the prediction was that the S&P 500 would only rise 3%.

If Wall Street predictions were anything to go by, you would have been more heavily invested in 2022 (market fell -19.44%) and reduced your holdings into 2023 (24.23% rally) and then reduced again in 2024 (25% rally). In short, you would have got it all the wrong way around and would only now be close to covering your 2022 losses (depending on the % reduction of your allocations).

After failing to anticipate the soaring stock market of 2023 and 2024, the strategists are more optimistic than usual now, predicting a price gain of 9.6 per cent for the next calendar year. That number doesn’t include dividends, which would lift the total return of the S&P 500 above 11 per cent.

As usual, there are plenty of reasons for both optimism and pessimism about the markets.

The Federal Reserve trimmed interest rates again last month, by one-quarter point, but will almost certainly slow down now. The economy has been strong, and some of the incoming Trump administration’s policies, like its intention to cut taxes and to lighten the regulatory burden for many companies, are likely to bolster the market.

Other policies, like much higher tariffs on a variety of countries, and mass deportations along with immigration restrictions, are far less popular among corporations and investors and could disrupt the global economy. So could political issues like funding the budget. Trump’s policies will cost money, and the debt ceiling will need to be raised once again. According to the Treasury Department, the national debt stands at a record $36.2 trillion as of Tuesday morning, more than the $36.1 ceiling.

How long the department can use extraordinary measures to avoid defaulting on U.S. debt “is subject to considerable uncertainty,” outgoing Treasury Secretary Janet Yellen warned last week.

Where the market, the economy and the country are heading, are critically important questions which cannot yet be answered so it would be wise to disregard all current rose-tinted claims to omniscience, and continue to invest cautiously, based on history and long-term probabilities.

One simple fact of investing is that the probability of a positive return in the S&P 500 increases as the holding period lengthens.

In total, there were 1,164 months between January 1928 and December 2024, and the S&P 500 generated a positive return in 691 of those months. That means the index was a profitable investment on a monthly basis about 59% of the time during the past 96 years. Those odds are slightly, but not much, better than a coin toss.

However, the probability of a positive return in the S&P 500 improves as the holding period lengthens:

The S&P 500 has been a profitable investment over every rolling 20-year period since 1928. That means owning an S&P 500 index fund for at least two decades has always been a profitable investment strategy.

Past performance is no guarantee of future returns, but a lot of the time it is all we have to go on. There is a reason why hedge funds do better in years where stocks perform. If the average return of the S&P is 10% over the last 30 years (as of December 2024 source: tradesthatswing.com) then the fact is, you are better off predicting and investing in, a market rise rather than a fall.

Having said this, we believe that what we have developed at TPP is the best of both worlds. If you want to track the S&P, you can now do so at a multiple of between 1.5 and 2. This means if the S&P returns 10% this year, your allocation to it would return 15% - 20%. This obviously works to the downside as well, but if you in it for the long term, and you can handle falls of 30+% in the bad years, then over time, you benefit from heightened and compounded returns.

We also have strategies which look to try and beat the indices by buying in after a market fall, and selling out after a market rally. The perfect climate for these trading strategies is a volatile market without much direction. Add this to a tracker, miss some of the falls, and the overall goal to beat the index can be achieved. It’s why we built TPP, and it’s why thousands of investors are opening their eyes to a new world of investing.

Disclaimer: The views expressed in this article are the author’s own and should not be considered in rendering any legal, business or financial advice.

Past performance may not be indicative of future results. Therefore, you should not assume that the future performance of any specific investment or investment strategy will be profitable or equal to the corresponding past performance.

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