Thinking Probabilistically
Having a good sense of historical stock market returns is crucial context for the financial decisions you make today.

While past performance does not guarantee future results (haven't you heard? 😛), you do need actual data to start building your mental modal for how the world works.

This data shows that on a year to year basis pretty much anything can happen in the stock market. You should expect volatility and randomness, as the market tries to digest the news of the day. The market reacts from the perspective of 'what does this news mean for the next 18 months?'

But we can beat the market by simply taking a longer-term view. If you zoom out and look at market returns in increments of 5 years instead of every 1 year, it smooths out the news digestion cycle, and we see less volatility. Check it out:

Post media(Gif source: The Measure of a Plan)

The exciting thing is that this dynamic continues when you zoom out even further. Looking at the market in 10-year and 20-year increments virtually eradicates the periods where the overall return was negative.

Does this mean that the dynamic will continue in the future? No. You could lose money if you invest in stocks and hold for the next 20 years. But the question you have to ask yourself is, what is the probability I will lose money?

You will never know anything with complete certainty in life. You are forced to make decisions every day on incomplete information. The only thing you have in your control is your decision making process; not the outcome.

I for one am ok with taking the risk of losing money over the next twenty years. Life is short and I have identified a game where the odds are in my favor. Time to act.
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