…Holding stocks for a day or a week is not much better than a coin flip. In that time frame, you don’t have the luxury of waiting for stocks to come back and any decline should make you nervous. In contrast, holding stocks for 20-30 years has never yielded a negative return, even for investors who bought at the peak in 1929 and held throughout the Great Depression…
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Data Source for all Charts herein: Bloomberg, YCharts
The big money in markets is made with patience and time. The longer the time horizon, the more time to compound, and the higher the expected returns.
Short-term speculation can at times lead to extremely large gains (ex: 17% in one trading day). If you find yourself in such a situation, understand that luck – not skill – is the driver. The real skill? Saving and investing for long enough to minimize the role of luck. This, unlike fortuitous short-term gains, is a repeatable process.
One appeal of short-term trading is the notion that losses are truncated. This is generally true, up to a point. The worst day in stocks (-20%) is far lower than the worse month (-43%) or worst year (-71%) but at the 5-year mark this trend begins to reverse course, and by 20-years the worst return was actually positive. The worst 30-year rolling return in the S&P 500? 559% – which equates to an annualized total return of 6.5%.
The next time the stock market has a large decline, examine your emotions. Are you exuberant or despondent? The answer will tell you if you are an investor or merely a speculator.
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How much would an investment in the S&P 500 be worth today, with dividends reinvested but adjusted for inflation, had you invested that money 5, 10, 15, 20 and 30 years ago? The following charts illustrate the annualized real rates of return over those periods of time.
One would think that following two major market corrections of over 50% within the last two decades, investors would have a better appreciation for how much time it takes to compound your way out of losses. While buy-and-hold investors who stayed true to their strategy over the last two decades are indeed ahead, they lost many years of valuable compounding time in a quest to “get back to even.” The bottom line is that corrections and crashes matter a lot.
The only way to make money in the markets is with a long-term perspective. That’s it! Instant-access, low-cost trading and a mountain of stock data are both a blessing and a curse. The fact is we have too much information available to us, and most of it is useless noise.