Time May Also Help with Predictability in the Stock Market

Wednesday, March 29, 2017 |

Last week I quantified the longer you stay in the stock market the better the chance of earning a positive return.  There is also another benefit of a longer time horizon: less volatility.

Source: Bob Shiller, Capital Advisors

The above chart represents the standard deviation of the annualized S&P 500 total real returns (including dividends, after inflation) on a rolling monthly basis since 1900.  On the horizontal axis is the Years Invested and on the vertical axis the Standard Deviation.  For example, for every one-year period, the standard deviation (see definition below) was 21%.  However, at 10 years that decreases to 6% and at 30 years you are at 2%. 

To put it simply, the longer you stay invested the less volatile and more predictable stocks returns have been.  We can visualize it as below:

Source: Bob Shiller, Capital Advisors

The above charts use the same data to compare one-year returns to 30 year returns.  As you can see, the one year returns are a lot noisier with a larger scale.  While the 30-year returns have some variability, the variability is substantially less than the one-year and stay mostly in the 4% to 8% range.

As you can see, the longer your investment timeline, the better chance you have of earning a positive, more stable return.

Standard deviation is a statistical measure of the range of performance in which the total returns of an investment will fall. When an investment has a high standard deviation, the range of performance is very wide, indicating that there is a greater potential for volatility. Past performance is no guarantee of future results.

The S&P 500 Index is an index of 500 of the largest exchange-traded stocks in the US from a broad range of industries whose collective performance mirrors the overall stock market.  Investors cannot invest directly in an index.