Why You Should Never Bet on Red

Claire loves the action of the roulette table.  The marble bouncing around the wheel.  The people yelling and screaming. The chips clinking onto the table.    She preferrs winning often to winning a lot, so she only bets on black or red.  

About an hour into the action, she noticed the roulette ball kept landing on black.  So she started betting only on black.  And won.  A lot. 

Curious, she asked the dealer if there was something funny going on.   To her surprise, the dealer explained the casino had deliberately rigged the marble to land on black 70% of the time.  He said it was a new marketing gimmick to get people into the casino.

Claire, being brilliant, bet on black into the wee hours of the night.  She came with $200 and left with over $10,000.  

Monday morning she called her Financial Planner to tell him the good news.  After exclamations of shock and joy, Craig said "And now you get it."

"Get what?" she asked.

"Get investing.  You have two options - red or black.  The marble lands on black 70% of the time and on red only 30%.  Given those probabilities why would anyone - EVER - bet on red?  Betting on red means you have a 70% chance of losing"

"Exactly," Claire replied.  "That's why I only bet on black.  But what does that have to do with my investment portfolio?"

Craig explained.  "Just like betting on red or black, you have two options: either you're invested or you're not. 

"Historically, in any given year, there's a 70% probability the stock market will go up and a 30% probability it will go down.    Put another way, if you're NOT invested you have a 70% chance of losing money. 

"And like roulette, it's completely random.  There's no way to predict if it will go up or down.  If there was, then everyone would do it."

 "Ah! That's right!" Claire exclaimed.  "I do remember you telling me that.  And that's why we buy and hold our portfolio even in the worst of times.  Maybe it "lands on red" a few times in a row, but you know it won't last for long."

"Exactly!", Craig enthusiastically replied. "Now treat yourself to something nice with half your winnings and put the rest into your retirement savings.  If you need me I'll be in Vegas at the roulette wheel!"

Is this a fantasy land Craig and Claire live in?   Nope.  This is exactly what's happened since we started tracking the markets at the turn of the 20th century.

Some recent evidence is below.    The bars are actual annual returns of the S&P 500 from 1980 to today.    27 out of the last 36 years have seen positive returns. 

Also note the red dots.  They are the intra-year low.  For instance, in 1980 the market finished 26% higher than it started.  But at some point, it was down 17%.  

The takeaway is simple:  Don't bet on red.  Stay invested.  Always.

(One caveat: Retirement.  Your short-term living expenses should NOT be in the stock market. That's why we keep 7-15 years of living expenses set aside.  Everything else stays in).