"X% of the time you make money investing in Y over Z time period"

[ericastewart]

There is one investing statistic that I see more than any other. I’ll be innocently browsing Twitter or in the comment section of Reddit or blog post and someone will inevitably throw out this stat. It’s typically used in one of two ways:

1. Hey you, look at this statistic. It’s amazing. How can you not invest? You’re an idiot.
2. Hey you, look at this statistic. Your argument is invalid. You’re an idiot.

Either way, the fundamental premise is the same: invest now and as much as possible (if not, you’re an idiot).

The statistic I’m referring to is some derivative of the following:

X% of the time you make money investing in Y over Z time period

Actually, more often than not it is the following version of the above that is cited:

99% (or 100%) of the time you make money investing in the S&P 500 with a 20-year investment horizon

Now, there is nothing intrinsically wrong with this statistic or using this statistic per se. It is correct. It is a fact. What riles me up a bit is the way it’s used and what most people are saying implicitly when they use it.

They make it sound like the result of a fucking scientific experiment. Like the boyz at the lab ran the test once – ok, we made money, cool – then ran it again – positive again, nice – and again and again and again until they arrived at the conclusion that you basically never lose money investing in this way.

But this isn’t even close to reality. Firstly, the underlying mechanism is waaaay more complex and the observations more difficult to interpret than typical experiments. Secondly, the outcomes of this “experiment” are not iid outcomes. The observations are not individual, separate events. When people use this stat they make it sound like (implicitly, to be fair) it’s not the case that overlapping observational periods are a thing.

But they are; it’s usually based on 20-year windows moved forward by 1 month to create a new window. A “new” observation. I understand the rationale behind using a month as the time increase for a new period (most people invest monthly, I guess) but might the results be different if a different time period was used?

Using increasingly partitioned periods lends increasing weight to frequency of outcomes and masks significant downturns. And size is as important as frequency, particularly in investing in which the distribution is fat tailed, dominated by large moves rather than regular monthly moves.

What also makes me somewhat uncomfortable is the fact that this stat is only concerned with 1 index of 1 country in 1 particular period of history. A period in which the US was the most dominant economic force in the world, (nearly) entirely uninterrupted by economically-crippling events like wars, viruses, famine, currency collapse, defaulting on debt, mass emigration, brain drain, etc. etc. etc. Business has been, truly, booming.

But what about other countries in other time periods? One might see this statistic, infer that the stock market, any stock market, essentially doesn’t go down over 20-year periods, and swiftly invest the entirety of one’s life savings into the stock market. Or do something similar. This can go horribly, disastrously, painfully wrong.

Ok, the above is technically correct, but not a valid excuse for abusing this statistic without sufficient caveating. Induction is difficult. We see this stat and think that history will repeat itself. We may pile everything into our domestic stock market, or a global tracker, or the US market thinking we can’t lose. The probability is 0. We are certain.

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Is this just a me thing? Has anyone else had these feelings before?

 

[nontheologian]

@ericastewart Ignoring inflation and reinvesting dividends and using say 1945 as a start date, couldn't you grab any 500 medium to high cap shares and get the same result?

 

[julia736]

@nontheologian You'll match any given index pretty closely with 40 or 50 stocks from the same asset class.

 

[stevenxuniv]

@ericastewart I could almost guarantee that most people using this statistic haven’t been investing for 5 years. Just spouting some statistic they seen online about compound interest

 

[jmv]

@ericastewart A good point, but probably overthinking in a personal finance context. Risky markets have a positive expected return but lots of uncertainty in the realized return over any given horizon. The implications of the original falacy are actually kinda fine: take whatever risk you're comfortable with and sit on those investments for a long time. I guess the subtlety that you might miss with these dumb stats is that you need to be sure you are genuinely comfortable with the possible drawdowns over short but also longer horizons.

The technical failure is a trap that even professional investors fall into (often when when it supports their story, shock). My favourite version is calculating correlation of overlapping rolling returns with some macro variable then going "hey the r squared is really high". Most people (including in the investment industry) don't have much in the way of formal statistical training and it really shows.

 

[tolearn]

@ericastewart

Is this just a me thing? Has anyone else had these feelings before?

Its not just you. Anyone trying to justify investing even in a diverse global tracker as a zero risk method of making money should be ignored IMO. They probably have their own motives, and that motive isn't the listener's financial success.

I don't think we should be taking anything that has inherent risk, and reducing the entire concept down to catchy soundbites that then make that risk seem inconsequential.

 

[seventeen76]

@ericastewart This is thinly-veiled and undisclosed promotion for your own blog in violation of the 10:1 self-promotion rule -- as was your previous contribution to UKPF last year