August 4, 2013

1 in 5 chance You'll Lose Money in the Stock Market in a 5 Year Period

With savings accounts generating less than 1% in interest nowadays it gets tempting for people to look elsewhere to find higher return on their savings.   Some folks then decide to invest their savings in stocks.   Now putting money in stocks is great for the long run and I still feel its going to net you the best return over 10 years or longer.   However if you have a need for money in a shorter term then putting it in the stock market can be quite risky. 

I pulled the historical return data of the S&P 500 from Yahoo Finance.  They have numbers going back to 1950, so thats over 60 years worth.

Lets just look at a 5 year period.   I'm looking at returns over 60 month periods starting on any given month.   So if you start from July 1950 and go to July 1955 or October 1983 to October 1988.  

Here's how frequently you would have gotten returns in different annual rates:

So just shy of 1 in 5 times you would have lost money in the market over a 5 year period.   About 1/3 of the time you would have averaged 10% or better, which is quite good.   In the middle you get 0% to 5% returns about 1 in 5 times and a little over 1 in 4 times you'd get between 5% and 10%. 

(side note:  The title of this article is written as a prediction but its based on the assumption that the future of the stock market will act the same as the previous 60 years and there is no guarantee that will happen moving forward, but I think it sounds better the way written and I personally think the market will more or less act similarly in the future)

The worst return for a 5 year period was -8.5%  annually and the best return was 26.2% annually.  

The odds are still in your favor that you'd have done well in any given 5 year period.     However the point here is that there is still a significant risk that you could lose money.   Theres still that roughly 1 in 5 times that people would have LOST money in the market.    Keep in mind that this doesn't account for inflation.     And it doesn't compare to simply making 1% or so in a CD or getting a safer 0-5% return in low risk bond funds.   Stock market investment is not for the short term.    If you can't stand to lose money then I wouldn't put money in the stock market for less than 5 years. 


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