Q. In your response to Steve in Satellite Beach you wrote “Investing should be a long-term endeavor … in the long run you should be better off learning to be resilient rather than trying to be nimble.” I love the resilient/nimble line but what is considered “long-term”? How resilient do I need to be? — Peter in Indialantic
A. I love that statement too, Peter. I have repeated it often after hearing it at a conference, but I regret I don’t recall who I heard say it.
“Long-term” is a relative term, views vary, and there is no official universal definition. One way to look at it is through the lens of market performance. What does the data tell us?
Pick a day at random since 1950 and the chances that the S&P Index, a measure that tracks the stocks of large U.S. companies, went up is 54%. That’s barely better than a coin flip. Pick any month in that period and the win rate increases to 64%. Pick any 12 consecutive months and the odds increase further to 79%. There is no period six years or longer with a win rate under 97% and all the periods of 12 years or longer produced positive returns.
The behavior pattern is obvious, the longer the time frame the better the chance of making money investing in stocks. Further, the longer the time frame, the lower the loss in the few times losses appear. The shorter the time frame, the more likely it is the market will decline and the decline will be severe.
Since 1950, the worst 10-year run for the S&P 500 produced a -1.38% annualized return while the worst one-year return was -37%. The chances of making money in the market go up dramatically when you stay committed for the long term even when things look or feel awful — and they WILL look and feel awful. The index has dropped more than 10% at some point in nearly 40% of the calendar years since its establishment in 1926. Volatility is the norm and should be expected, not feared.
It is a classic trade-off between risk and reward. You trade periods of short-term pain for longer term gain if you are disciplined enough to stick with it. Hence the need for resilience.
Terms like long term are a bit nebulous. Next month marks the sixth anniversary of my dad’s passing. In many ways that was a long time ago. Since then, my daughter earned her doctorate, my son has lived in three states, my wife and I have visited five continents, Mom rests in peace next to Dad, and there was a global pandemic. And yet, it often feels like Dad just died.
You can influence your perception of time by making sure your portfolio is designed to put the odds in your favor. You want to be diversified and put money in stocks for longer-term goals. When the inevitable downturns occur, you can remind yourself you weren’t going to use those funds for a while. That can help you exercise your resilience and stay disciplined and patient.
Investing is not easy, but it is less stressful and easier to pull off than trying to outmaneuver a volatile market. Trying to get in or out ahead of market zigs and zags is more speculating than true investing. Regardless of your definition of “long-term” the record is clear: The longer you can stay invested, the higher your chances of success based on past performance.
Dan Moisand, CFP® has been featured as one of America’s top independent fee-only financial planners by at least 10 financial planning publications and practices at one of America’s most decorated independent firms. For more info, email him at dan@moisandfitzgerald.com, visit moisandfitzgerald.com or call Dan at 321-253-5400, Ext. 101.
Originally published on FloridaToday. Read the original article here.