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How to Make Money in the U.S. Stock Market 💰💰💰

June 15, 2021

Quiz time. What are the historical odds of making money in U.S. markets over the following periods of time?

  1. 1 day
  2. 1 year
  3. 10 years
  4. 20 years

The answers — which come from Morgan Housel's eminently readible and enjoyable The Psychology of Money  — are listed below. They are both shocking and entirely unsurprising. Especially if you are a Rolling Stones fan. In all seriousness, Mick Jagger had it right when he sang that time was on his side.

Simple but Not Easy

Invest for the long term in a low-cost index fund tied to an index like the S&P 500 or the Wilshire Total Stock Market. Don't take my word for it. It's what Warren Buffett recommends. The late founder of Vanguard and champion of index investing, John Bogle, called the success of long-term, low-cost indexing the "humble rules of arthmetic." 

Of course it's easy to tell someone to do this but unless you have some combination of experience and/or faith in data and/or expertise and/or the mental fortitude to weather market drops, this proven strategy can be hard to execute. Why? We are wired for the short term.  

Charting Success

Perhaps this chart from the Visual Capitalist can help cement the case. It shows annualized returns for the S&P Composite Index and the S&P 500 Index over rolling periods of time in 1-, 5-, 10-, and 20-year horizons between the years 1872 and 2018. It's almost mesmerizing watching slivers of red give way to fields of green. Try it yourself by clicking the animated chart

 

Stay wise and well (and invest for the long term. I'd also recommend adding a low-cost international index fund to your portfolio for stock diversification).

 

Answers: 1) 50%; 2) 68%; 3) 84.5%; 4) 100% (The Psychology of Money, p. 118)