Small gains result in large gains

Since the launch of the S&P500 in March 1957 we have seen the index continually climb to the current levels near the all-time high of 5 600 points.  The S&P 500 is a market capitalisation weighted index of the 500 largest companies listed in the US.  Over the past 67 years this index has delivered an annualised return in the low double digits that comfortably beats US inflation and the S&P500 has almost become the proxy for world stock markets.  

Over the last ten years investing in the US has been the most successful trade as a strong US economy and an abundance of growth companies (think the majority of tech companies) has driven the US stock market higher, far quicker than other exchanges.  

The S&P500 was launched on the 4th March 1957 but using historical market data the starting valuation date of the index was set as 3rd January 1928.  Despite the Great Depression happening near the valuation start of the index, if you had invested $100 on the 3rd January 1928 that investment would be worth more than $1m today, assuming reinvestment of all dividends.  A great and successful investment all around. 

What you would be surprised to know is that the S&P500 only closed up on just under 54% of its trading days, losing money on a staggering 46% of trading days.  Just a small weighting in the favour of positive days.  The stock market climbing makes inherent sense as equities should be your best protection against inflation.  Most companies are able to adjust their selling prices in response to their increasing costs and thus act as the perfect inflation hedge (for their shareholders, not for their consumers).  It is for this reason that we are familiar with the common long-term stock market graph where it starts in the bottom left corner and finishes up in the top right corner.  But it takes just a marginal daily outperformance for the markets to achieve that. 

Recently reading Ben Carlson’s website – A Wealth of Common Sense reminds us that it is just not the markets that just need this small gain to deliver a very large result.  Ben references Roger Federer’s recent speech at the Dartmouth Graduation.  Besides a constant reference to the game of Beer Pong by Federer he spoke about the importance of a point when playing tennis.  No matter how well you win the point or how poorly you play to lose the point ultimately a point is a point.  And you know how many points Federer won across his career – exactly the same as the up days on the stock market.  Roger Federer won just 54% of all points that he ever played, which resulted in him winning in excess of 80% of all single matches that he played in.  Small gains resulting in big gains. 

This is the result of the power of compounding, which in itself is a topic for another whole Magwitch Insight article.

Magwitch Offshore is a leading provider of Global Balanced ETF portfolios with products in all major currencies. Magwitch utilises an advisor distribution model and their portfolios are available through offshore endowment structures provided by some of the larger Insurers.