I wouldn't dream of investing in shares over an investment horizon as short as 4 years as suggested.
Intend to move in 4-5 years also so not willing to lock savings away for long term
The net result is that the return from investing in the stock market should, on average, be higher than putting your money on deposit.
Looking at historic US data, there is a roughly 70% probability that US stocks (total market) will outperform 5-year US Treasuries over any given 5-year holding period. However, that ignores investment expenses and, critically, taxes.
There are no investment costs involved with buying 5-year State Savings Certs and the returns are tax free. In contrast, there are costs (commissions, stamp, etc) involved with purchasing equities directly, dividends are taxed at an investor's marginal rate and any gains are subject to CGT.
When you take account of investment expenses and taxes, I would suggest that the risk/reward analysis changes dramatically and the probability of a diversified portfolio of stocks outperforming 5-year Savings Certs falls dramatically.
I would "guesstimate" that the probability of the net, after-tax return on a diversified equity portfolio outperforming the net, after-tax return on State Savings Certs over a 5-year period is materially less than 50%.
In other words, it's a bad bet.
If it's a "bad bet" over 5 years, then why is it not a bad bet over 10 years or over 30 years?
The math gives the following results for the probability that shares will outperform deposits.
Over 1 year 56%
Over 4 years 62%
Over 10 years 70%
I'm not sure if this answers your question but the total return of the S&P500 for the four years ended 31 December 1933 was -70.5%.Have you any way of guesstimating the potential losses over 4 years?
From the model, which for the nerds is called the lognormal model and is used by practitioners for pricing options.Have you any way of guesstimating the potential losses over 4 years?
Brendan
Interesting observation Duke – I never thought of it in those terms.I personally define gambling when someone accepts that on balance the expected outcome of a punt is negative, but still undertakes it in the hope of a positive outcome.
Nope, no expenses or taxes.Interesting observation Duke – I never thought of it in those terms.
Maybe the better distinction is between investing (where there is always a reasonable expectation of a gain) and speculating (where a significant risk of loss is more than offset by the possibility of a significant gain).
As a matter of curiosity, does your model take account of investment expenses or taxes?
Interesting observation Duke – I never thought of it in those terms.
I wouldn't arrive at that conclusion Brendan.If something has a positive expected value, then it's worth the investment, if you can handle the risk.
But if an honourable man like yourself offered her 6/5 odds on a €10,000 toss, she should take it.