The Value of Long Term Investing

Moving in and out of the market ‒ as many may have experienced ‒ can be a reactive and emotionally nerve-racking approach. When opportunity seems to beckon, many market participants jump off the sidelines and move their cash into the market in hot pursuit.

Similarly, when the market is volatile, falling or otherwise scary, many of the same market participants flee, abandoning a long term investing discipline, selling their investments and moving their cash back to the sidelines.

There are many risks of abandoning a long term investing discipline and moving in and out of the market instead of staying put . . . selling low what you previously bought high, compounding that mistake multiple times, identifying the right company to invest in and getting the timing wrong, missing the opportunity to reinvest your dividends and accelerate the compounding of your returns, reducing your returns with high trading costs, creating unnecessary taxable events . . .

The list goes on.

By contrast, patiently remaining invested in the market over time ‒ in other words, long term investing ‒ through the inevitable ups and downs of stock price swings may be far more profitable than attempting to time the market. This may be hard for gut-guided investors to accept. But the preponderance of evidence supports the likely greater value of long term investing.

Studies of historical S&P 500 returns since 1928 have shown that the longer you’re in the market, the less likely you are to lose money. After one year, the probability of loss decreases markedly ‒ and the probability continues to fall over the subsequent several years of long term investing.

Another reason to remain invested for the long haul and follow a long term investing plan: stock market returns are lumpy ‒ they come from a mix of shorter periods of both rising and falling prices ‒ and it’s impossible to predict precisely when those periods will occur. Take a look at these successive five-year compound annual rates of return for the S&P 500® Index with dividends reinvested:

December 31, 1991 ‒ December 31, 1996     16.9%

December 31, 1996 ‒ December 31, 2001     10.6%

December 31, 2001 ‒ December 31, 2006       6.1%

December 31, 2006 ‒ December 31, 2011      -0.5%

December 31, 2011 ‒ December 31, 2016     14.9%

December 31, 2016 ‒ December 31, 2021     17.9%

Contrast the results above with the compound annual rate of return for the entire 30-year below for the same S&P 500® Index with dividends reinvested:

December 31, 1991 ‒ December 31, 2021     10.8%

Some might argue that it would have been better to avoid a long term investing discipline and invest only during the 1991-2001 and the 2011-2021 time periods and avoid the market during the 2001-2011 time period altogether. This makes sense only in a world in which you can see the future.

Besides, the market often bounces back quickly even after gut-wrenching price drops. In the month following the COVID-19 lockdowns, the S&P 500 plunged  33.7%. But within less than five months the market recovered all of its losses.

Similar stories have played out after a number of events, including the assassination of JFK, the terrorist attacks of September 11, 2001, and even the market crash of 1929. The bottom line: market drops are often followed by significant rises. Abandon a long term investing discipline and jump out at the wrong time, and you miss the rebound.