What's the Probability

The future is always uncertain. I am not a gambling man, but many times decisions are made by asking the question, "What are the chances that this is going to be successful?" When it comes to investing, the probability is in our favor in the strategic decisions that we have made. It is also important to understand that no strategy works successfully 100% of the time, so what is the probability of:

A. U.S. large-company stocks beating one-month Treasury bills?

We may be in one of the minority periods now, but given that one-month Treasury bills are at 0% now, the chances of stocks doing better in the future are pretty good.

B. U.S. large-value-style stocks beating the S&P 500?

C. U.S. small stocks beating U.S. large stocks?

More importantly, add to these questions how stocks perform coming out of a recession, which is certainly a fair way to describe our current environment:

A. How have U.S. large- and small-company stocks performed after recessions since 1953?

B. How have value-style stocks performed after recessions since 1970?

Value-style stocks significantly outperformed growth-style stocks after recessions for both large- and small-company stocks for all time periods referenced above.

I am also reminded of a friend who rented a motorboat while on vacation, but the motor wouldn’t start properly and he had to leave the motor idling when not in motion. When he made this fact known to the marina owner, he got a nice southern drawl answer of, "Well, nothing’s perfect…" Truly memorable words to live by.

Clearly, we want you to understand that no investment strategy works 100% of the time. U.S. value-style stocks, both large and small, and U.S. small-company stocks have underperformed in July and August 2011, after having generally outperformed in the first half of the year. Using our "let’s look forward, not back" theme, the probability of stocks beating bonds and value-style and small company stocks providing superior performance coming out of recession is pretty good. In today’s age, having reasons to be hopeful should provide much appreciated financial peace of mind.

About Bruce J. Berno, CFP® Bruce J. Berno, CFP® is the founder of Berno Financial Management, Inc. a fee-only comprehensive personal financial planning and investment advisory firm headquartered in Cincinnati, Ohio. Since 1993, Berno Financial Management has been helping individuals and families achieve financial peace of mind. For more information about Berno Financial Management, visit http://www.bernofinmgt.com/.