What Does ‘Long-Term Investing ’ Mean?
Investing should be dull. It shouldn't be exciting. Investing should be more like watching paint dry or grass grow.
The Reddit forum Wallstreetbets has grown to fame after novice day traders followed the posts on the notice board and ganged up to take on some short-sellers in the early part of 2020. The investment discussions on the forum have been entertaining and provided great meme source material. A recent post that garnered a significant number of comments was one where an individual asked how long he should hold on to his stocks — he bought many at the beginning of 2021 and felt that he should have sold it last month when his profit was a few hundred dollars. After the recent sell-off, he was dismayed to see that his profit was only $20 after costs.
It may be an innocent question but it brings to mind the real mentality of thousands of investors out there — that the stock market is very much hit and miss depending on the stock you buy, and a holding period of 6 months seems far too long.
Warren Buffett has a great number of quotes on long-term investing but a famous one was when he said “Successful investing takes time, discipline and patience. No matter how great the talent or effort, some things just take time: you can’t produce a baby in one month by getting nine women pregnant.”
Many people compare the stock market to a casino, but in a casino the odds are stacked against you. The longer you stay in a casino, the higher the chance you’ll walk away a loser because the house wins based on pure probability. It’s the opposite in the stock market — especially if you hold a very well diversified portfolio.
Taking long-term US market return data as shown below, you will notice that as your timeframe increases (especially past 10 years), the probability that you’ll walk away with a positive return increases with it, steadily making its way up, and eventually settling at 100%. Those are great odds.
So what about global stock market returns in Singapore Dollars (SGD)? Surely there would be big divergence given how the SGD has strengthened versus the US dollar over the longer term? Well the answer is shown in the chart below. Apart from the 5-year percentages, the results are pretty similar.
This is good news for investors, and provides insight into “long-term investing”. If you are unable to sit in the same investment without tweaking it for at least 10 years, then perhaps investing is not for you. The longer your time horizon, historically, the better your odds are at seeing positive outcomes.
Whilst long timeframes bring your annualised returns closer to the average, it doesn’t guarantee you a specific rate of return. In addition, a drawback to “long-term investing” means that markets will play with your emotions without warning. Stocks can have you feeling like your heart was ripped out and dumped on the ground — like what happened during the COVID-19 sell-off in March 2020. Imagine seeing your wealth drop -5% to 10% every day. It’s not a pleasant bedtime story for many.
However, if you were armed with the knowledge that you would be nearly guaranteed positive gains by the 10th year, then episodes like 2020 shouldn’t bother you. Long-term investing would then be not so much of a concept, but rather, an actual fact.
