Photo by Mateus Campos Felipe on Unsplash

You have a 95% chance of making money in the market (without a financial babysitter) if you do two things right.

Deep in the uncharted wilderness, you hear the sharp snap of a branch. Your heart races and you crouch, senses on high alert for a mountain lion attack.

Dozing on the plane, you shock awake to a powerful jolt and the engines scream. Your chest thumps like a bass drum as you brace for a fiery impact.

The stock market plummets in an unstoppable crash, leaving you destitute, struggling to survive on rice and water in a ramshackle tenement.

Three terrifying events. Three visceral fears. All end in irrational outcomes that you logically know aren’t going to happen. Yet they feel real and inescapable.

Fear is a powerful emotion that drives the fight or flight reflex. Sometimes it’s reasonable and sometimes absurd. But when it comes to investing your money, you need a rational approach — not one that’s based on fear.

The truth about stock market returns

S&P 500 annual returns swing wildly from 53% gains to 37% losses — an astonishing range of 90 points. As a result, short-term investing is a dangerous proposition if you don’t know what you’re doing (few people do).

Longer-term investing, however, fares much better. If we look at various hold-times, we see that the longer you leave your money invested and untouched, the more predictable and stable your returns will be.

20-year hold-times reduce the range of outcomes to a slim 13 points, and every 20-year period in history has been positive — with a nice inflation-adjusted return of 6.7%.

5- and 10-year hold-times are good too, with moderate to low variability and excellent returns.

10-year analysis

Since 1926, the market has had 87 rolling ten-year periods. The chart below shows that in 84% of those periods, patient investors have earned 5% or more. Only 4 periods (5%) had negative returns, and those losses were small.

You have a 95% chance of a positive return if you invest in the S&P 500 and sit on your hands for ten years.

But what if you accidentally invest at the top of the market, just before a major crash? That would be devastating.

Or would it?

The truth about market crashes

Remember the financial crisis of 2008? Of course you do — it was terrifying. If you had made the unfortunate choice to invest at the peak of the market and sold at the bottom, you would have seen half of your wealth evaporate in little over a year.

But if you held on, you would have earned it all back in 3 years. And plenty more after that.

Investment isn’t about timing, it’s about time

If you’d held on even longer — until now — your poorly timed $1,000 investment would have quadrupled, earning a generous 9% annualized inflation-adjusted return.

There have been five major stock market crashes in the last 100 years. Here is how they affected the S&P 500 Index:

• 1929 The Great Depression: 89% drop over 3 years and 15 years to earn back your losses
• 1987 Black Monday: 22% drop in a single day, and almost 2 years to bounce back
• 2001 Dot-com Bubble: 42% loss over 2 years, and 6 years to recover your investment
• 2008 Financial Crisis: 49% down over 1.5 years, and a full 5 years to recover
• 2020 Coronavirus: 20% drop in one month, and a recovery in 6 months

Only once in the history of the S&P has a market crash failed to recover within a 10-year span, and that was almost 100 years ago.

The truth about financial advisors

The failure rate for financial advisors in the United States is 88%.

It’s a brutal business for newcomers — cold-calling for new clients, offering salvation from the fear of financial ruin. Few can build the momentum to earn a decent living so they give it up. If you choose to do business with an advisor, be sure to check their credentials and tenure before handing over your cash.

Advisors exploit your fears with promises of safe growth, and charge you 1–2% of your entire portfolio, regardless of their performance

Fees matter

Suppose you self-manage your investments and make 7% one year. Well done! If you had used an advisor instead, she would have had to earn 8% to 9% to equal your performance because she takes her cut right off the top. And she’d have to outperform you by that much every single year.

It’s possible but highly unlikely. Research from Goethe University’s business school dean Andreas Hackethal suggests that returns from advisor-assisted accounts badly lag the results from customers who handle their accounts on their own.

Since advisors rarely outperform the market, don’t consistently outperform individuals, and they charge handsomely for that, why not invest in the market yourself and beat the pros while saving money?

But not with all your money.

Self-investing rule 1: Bucket your money

Investments that you need (or may need) to live on in the next 3-5 years or so is your first bucket. That’s short-term money that needs to be stable and safe because it’s essential for your living expenses. If the market crashes, you may not be able to hold that money long enough for it to recover. Keep it balanced and diversified in cash, bonds, and safe securities.

Your second bucket should be invested in the market and held for as long as possible — at least 5 to 10 years. That means your money will almost certainly grow safely (if history is our guide).

If you’re working, you’re in a great position because you’ll be living off your paycheck and saving the surplus that you won’t need for decades. You’re assured of great market returns with such a long investment horizon.

Retirees have unique circumstances and fears, but the rule still applies

Retirees are different. They largely rely on a fixed income from Social Security, supplemented with savings to cover their living expenses. The fear of losing money is greater because replacement is hard, if not impossible.

But the rules can still apply to retirees. People commonly live into their 80s these days, and an investment timespan of 5 to 20 years is plenty for safe and reliable investment growth — which retirees would emphatically appreciate.

Rule 2: Invest in an S&P 500 ETF and leave it alone

The S&P 500

“Invest in the market” can mean a lot of different things, but in this article, I’m referring to the S&P 500 as “the market.” There are over 5,000 market indexes (organized groups of stocks that represent economic segments). The S&P 500 is one of three leading indexes and the one that is most commonly cited for consistent and diversified growth.

What is an ETF?

Exchange-Traded Funds (ETFs) are plentiful. They are groups of securities virtually identical to an index such as the S&P 500 or the NASDAQ. A quick online search returns scores of them, all inherently diversified with extremely low-cost management fees.

Discount brokers

To buy an ETF (or any securities), you’ll need a discount broker to self-manage your money. That’s where you’ll make your investments. There are several good ones that are SIPC insured and easy to set up.

Most important: Don’t touch your investments!

When the going gets tough, the fear sets in. The natural fight or flight reflex will urge you to sell, but now you won’t — because you know the truth about market returns, market crashes, and advisors.

You are empowered. Fearless!

Final point

For many years I paid financial advisors so I could sleep better at night. They had walls of diplomas and certificates and software programs with flashing bright charts and wiggly lines shooting up and to the right.

Most of the meetings I had went like this:

“We’ll use the S&P 500 as a benchmark,” they responded when I asked what returns I should expect.

“Well, if that’s our benchmark, why don’t we just put money into an S&P ETF index fund?” I asked.

“Oh, no, we can’t do that. We need to diversify, reduce the alpha/beta values, plan for retirement, and blah blah,” they obscured.

So for many years we did that, and for many years they missed the target. I shudder to think of how much of my money I left on those burnished oak conference tables.

So I took my money and left. I don’t need a financial babysitter for “peace of mind” and I won’t “sleep better at night” when someone else has my money. I took control of my investments fearlessly in two easy steps.

I bucket my money, buy ETFs for my long-term investments, and I sit on my hands.

… and so can you!

DISCLAIMER: I’m not trained as a financial expert. This article is for informational purposes only and should not be considered as professional financial advice. Do your research, talk to experts, and choose a strategy that is best for your life circumstances.