How to look past the hype and chatter
The S&P 500 is in the midst of a potentially-dynamic long-term run. Or not. How can both of these things be true? Here’s how to take a realistic approach to “long-term investing.”
That term is perhaps the most over-used and misunderstood in the investment business. It sounds great to say, “I’m a long-term investor” as if to say, “I have a great auto insurance policy.” In both cases, you know that bad things can happen. However, you know you have a fall back plan. The insurance policy does that if you cause an accident.
When it comes to the subject of long-term investing, many investors fall back on the idea that has been preached to them for years: “be a long-term investor.” Some interpret that to mean that if you don’t plan to use the money for a decade or two, you are “safe.” They argue that you don’t have to adjust your plan to account for the inevitable and sharp changes in prices during a stock market cycle.
Separate investment analysis from salesmanship
To that, I say, don’t bet your financial life on that. After all, many financial pros who preach this type of “long-term investing” have a vested interest to do so. They are investors whose fees and/or commission revenue is highly-dependent on stock prices going up.
When that doesn’t happen for a period of months or years, their backup plan is to become a cheerleader for the stock market. In other words, stay invested very similarly to how you were before the market danger entered the picture. While this is not my belief system at all, a peek at the pair of charts below will help you find your perspective on this part of the Wall Street shell game.
The top section of the chart is the “rolling” 10-year annualized return of the S&P 500 Index. That is, the return over every 10-year period, but shifting the start and end dates forward by one month each time. On the right side of that chart, you see that it currently sits at about 13%. Compounding your money at a 13% rate for 10 years is a very strong return. As you can see, over the last 40 years, the 10-year return has rarely been higher.
That is good news if you have been in strong “accumulation mode” toward retirement for the past decade. However, if you are looking at it as someone just starting to accelerate their savings and investing, you might be concerned you just missed out.
Now look at the lower chart. This is the 20-year annualized return of the S&P 500. It tells a very different story as compared with the 10-year chart. Setting aside the coincidental “sign of the devil” (6.66% annualized return) in the latest monthly period, this chart shows signs of accelerating, similar to how it looked in the early 1990s. That would be very good news for investors who define “long-term” as 20 years instead of 10 years.
What can we conclude from these charts?
Of course, there are no sure answers when predicting investment returns. Markets of today are particularly influenced by many factors that did not even exist during the past 10 or 20 years, or before then.
However, we can make a simple observation to try to “thread the needle” while accounting for the realities of how the stock market works in today’s world. Consider this possibility:
* The next 10 years’ return on the S&P 500 is terrible, which seems to fit the historical ups and downs of that top chart.
* The next 20 years’ return on the S&P 500 continues to accelerate. That is partly because the last 10 years pumped it up after the Global Financial Crisis in 2008, and because part of the Dot-Com Bubble is still within that latest 20-years.
Long-term investing: a series of shorter-term cycles to be managed
So, which is “long-term?” The best way to think of this is that being a long-term investor is NOT the same thing as dropping your money in an investment (S&P 500 Index fund or otherwise) and then letting it “work” for you over time. Because as you can see on both charts, there are long periods of time where holding the broad stock market doesn’t work. There have been negative 10-year returns, and 20-year periods where the return was in the low single-digits.
Instead, look at the “long-term” as a series of short-term time frames, each of which needs to be managed according to the particular risks and reward opportunities it presents. Long-term investing is for everyone. But that is not the same thing as buy-and-hold forever. We cannot know what the next decade or two holds for us as investors. However, we can be proactive in managing through the many cycles and sub-cycles that ultimately comprise a decade or two of total returns.
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