Answer: It depends on your time horizon. Short term, it’s risky. Long-term, not so much.

Great chart here (from Barclays) demonstrates how your probability of making money (“gains”) in the stock market increases the longer your time horizon:

“This chart shows the proportion of gains and losses we observe for the same investment (the MSCI World Developed Equities Index) as we change our monitoring horizon from 1 day to 5 years:”

Let me explain:

• First, the MCSI World Developed Equities Index is a stock index that includes large-cap and mid-cap companies in 23 developed countries.
• If you are looking to day trade the MCSI index fund, past history shows that for a one day time horizon, you would have shown a gain for 52% of the days in the sample (not sure how long a timeframe they analyzed)
• Stretch out your time horizon to five years, and 91% of the five year periods analyzed showed a gain.
• If you want to geek out a little bit, you can learn more about this concept of rolling returns that was used for this analysis.

Questions:

• You are a nervous, novice investor who likes to track the value of your index funds every day. Is this a good idea, why or why not?
• Why do you think that the proportion of gains is so much higher for longer time frames?
• Does this chart change how you will think about risk?
• This analysis looked at a diversified index that held stocks in many countries. What do you think this chart might look like for most individual stocks?
• Your friend says the strategy of “buy and hold,” that is buying diversified index funds and holding for the long term, is for “losers” and that you have to actively trade to make money. Do you agree? Use data from the chart to make your point.

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Looking for an engaging Investing activity that teaches students how difficult it is to predict an individual company’s stock prices? Check out NGPF’s extremely popular Joining the Market Project aka Ravioli Den.

About the Author

Tim Ranzetta

Tim's saving habits started at seven when a neighbor with a broken hip gave him a dog walking job. Her recovery, which took almost a year, resulted in Tim getting to know the bank tellers quite well (and accumulating a savings account balance of over $300!). His recent entrepreneurial adventures have included driving a shredding truck, analyzing executive compensation packages for Fortune 500 companies and helping families make better college financing decisions. After volunteering in 2010 to create and teach a personal finance program at Eastside College Prep in East Palo Alto, Tim saw firsthand the impact of an engaging and activity-based curriculum, which inspired him to start a new non-profit, Next Gen Personal Finance.

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