November 05, 2020

Long-Term Investing + Optimism = A Bright Future, Ep #18

20 minutes

There’s a lot of negativity in the news. It can weigh on your mind and impact how you view your life—and your investments. The turmoil of the current political climate paired with uncertainty in the economy and then magnified by the Coronavirus has us all questioning the future. Where do we stand today?

I believe the path forward is bright. I believe what we have been through can shed light on our future. So in this episode of Retirement Made Easy, I share a look into the past 45 years of investing. If you’re looking for an optimistic take on the future, don’t miss this episode.

You will want to hear this episode if you are interested in...

[2:12] What the past 45 years can tell us about the future
[6:48] The secret to most investors accumulated wealth
[11:54] The DALBAR study and correlation with investing

What the past 45 years can tell us about the future

I chose to look at a 45-year timespan because 45 years is a lifetime of investing for most people. All of the information referenced in this episode is from J.P. Morgan’s Guide to the Markets and the Guide to Retirement. I’m referencing the S&P 500 index as a gauge of the US stock market as a whole.

Since 1975 we’ve been through wars, terrorist attacks, assassinations, Y2K, hurricanes & tsunamis, the 2008 financial crisis, and more. But since 1975 the global population has grown 80%. The US economy tripled (measured by GDP growth) during a time where we only saw 50% population growth. In 1975, the S&P 500 index was 90. January 1st, 2020 the S&P 500 was 3,257. That is a 4,278% increase in 45 years. That 45 year period has been the greatest accumulation of wealth in this country’s history.

The S&P 500 averaged almost 9% per year for 45 years. In 1975, there were only 4 billion people in the world with over half in extreme poverty. Today, there are more than 7 billion people and only 1 in 10 live in poverty. Those people’s lives got better and moved into the middle-class.

You can look back and see we have come through a lot. Yet there are so many reasons to be optimistic about the future. In my eyes, pessimism doesn’t line up with reality. The world has evolved and things have gotten better. Many lives have gotten better. People have been able to accumulate wealth. Why? Because they’ve focused on their long-term goals.

The secret to accumulating wealth: Invest for the long-haul

Most investments are meant to be held long-term, and that’s what many people forget. All of the successful investors I’ve known have focused on the long-term rising trendlines and have ignored temporary and short-term discomfort. When the market pulled back and corrected in 2008, they held strong.

Failed investors lost sight of the long-term potential of their investments. It ruined their investment plan. Don’t mistake a temporary decline for a permanent loss. If your home value drops 20%, that’s a temporary loss. If it burns down and you don’t have insurance, that’s a permanent loss. I’m not worried about a short-term value reduction of 20% when my home is a long-term investment.

Can you stomach the volatility in the market?

A famous portfolio manager named Peter Lynch said “It’s not the head that determines investment success—it’s the stomach.” Can you stomach the volatility in the market? Can you handle the roller-coaster ride? Being able to handle the volatility in the market determines success. I believe in buying quality investments long-term and sticking with them. If you can’t stomach the temporary declines, don’t invest aggressively or in volatile assets. You have to decide what side of the fence you sit on.

The DALBAR study further emphasizes WHY long-term investing is necessary

In the DALBAR study, mutual funds averaged a 2.5% return per year from 1999 through the end of 2019. A measly 2.5%. The same study showed the S&P 500 did over 6% per year. Home values went up an average of 3.4% per year during that same period.

Mutual fund investors did worse during that time period—but why? What led to the poor performance? The reason their return was so low is because they were buying and selling when they saw volatility. They weren’t investing long-term—but they’d be much better off if they did. Instead of investing in mutual funds, invest in the companies inside them where value can be found—and do it long-term.

The other day, Dave Ramsey said that panic is not an investment strategy. The price of your portfolio may be down 10% and your investments may be in the red, but hold on tight and remember your long-term goals. Don’t sell long-term investments in the middle of a recession or a pandemic. Selling your long-term investments at the wrong time says you’re giving up on your long-term goals. You must embrace patience and give them the time that they need.

Resources & People Mentioned