Much like the popular song “Million Reasons” by Lady Gaga, which is about relationships, people can also come up with a ‘million reasons’ not to invest in the markets. Just turn on the business news or any news program and chances are there will be segment after segment of negative reports. It takes a certain amount of optimism to see through all the media chatter and commit to investing for the long run. While the investor’s path is not always smooth, the long term rewards can be life changing.
Today’s business headlines focus on supply chain problems, government overspending, higher taxes, rising inflation and Chinese company debt problems. You would think that without any immediate solutions to these issues, the markets to be down but the market this week hit all-time highs.
During my nearly three decades of investing as a fiduciary for my clients, I have had to digest all sorts of headlines affecting my clients’ investments and net worth, but through it all have remained committed to staying invested, and the rewards for doing so have been great.
Taxes have increased and decreased multiple times over the years. Government spending has been a lingering concern for longer than anyone can remember. Somehow companies manage to prosper through the challenges which global markets and governments pummel them with, all while investors are rewarded by remaining invested rather than jumping in and out of the markets.
The Day by Day Viewpoint
Certain professional investors trade daily and make money on those short-term trades. When they are interviewed about their outlook, their perspective is often on the movement of the market that day or the minute-to-minute movement. Some portfolio managers oversee computer generated trading systems that make decisions based only on trading factors that have no impact on the long-term direction of the market. Are the comments of these day traders of any value to long-term investors?
Unfortunately, we can’t fully know the motive or position of an analyst or portfolio manager as they answer questions in interviews or comment in an article. For example, when one says they are “out of the market,” we don’t know if they got out an hour ago and will get back in an hour later, or are they out because they anticipate trouble on the horizon and will remain out for months. Despite this, many investors may hear a comment and make long-term decisions based on someone else’s short-term trading decision, which at the moment may have been a good move for that single person.
Seeing the Whole Portfolio Picture
There is a difference between asking someone with all their money in the market how they would invest additional money given to them than asking someone who is not invested in the market what they would do. With the markets sitting at all-time highs, it might make sense to remain in cash if one were to have an additional amount to invest that represented a small portion of their total portfolio. For example, someone with $1 million invested in the market might hold an additional $50,000 in cash and wait for a better opportunity. But someone with $1 million to invest who has nothing invested currently may be better off committing to the long-term and getting fully invested than waiting for an opportunity that many never come.
The markets move up more often than they move down. Any decision made may be wrong for a period of time but over the long run, staying invested has always been the better choice. For many experienced investors, the timing decision has been forgotten and replaced with consistency and commitment.
Early in my career, an uncle of mine told me of his mistake getting out of the market more than a decade earlier. At the time, he felt things were overvalued and that he would sell and wait for a better opportunity to get back in. Decades later he remained uninvested. The decades out of the market cost my uncle significantly. Interest rates in the bank were much higher than they are today but did not match the performance of being invested in the market over almost any time period in history.
Ten Year Averages
Someone investing in the market over the last 10 years would likely have earned an annualized return greater than 15% which is higher than historical average. A $100,000 initial investment would have grown to over $460,000 during this past decade. Over the past twenty-five years which included three very turbulent periods, you would have earned an annualized return greater than 8.5% and $100,000 would have grown nearly tenfold to $979,000. That’s not far from seven digits!
Remaining invested over long periods can have a profoundly positive impact on your life. A forty-year-old remaining invested to age sixty-five in recent decades would clearly benefit during their older years having those many years of compounding. Even for a sixty-year-old couple today, it is likely that one or both will still be living at age 85 to enjoy the benefits of twenty-five years of compounding.
Keeping Focused on Business
Lady Gaga closes her song, “Baby I just need one good one to stay.” The one good reason to stay invested is that doing so has historically been the right decision. Relationships, like the markets, often don’t follow a simple and easy path. My knowledge of investing leads me to recommend that my clients invest for the long-term and don’t try to time the markets. And my long time clients have been well rewarded.
Advising individuals and their families over multiple decades has been one of the most gratifying experiences in my life as the positive decisions made impact these client families, potentially for generations. I think I’ll keep my job and leave romance & relationship advice to someone else!