Long-term investing is VERY different from gambling
Ironically, while researching some data for this column, the first article I came across was one written by Matt Kranitz for USA Today back on February 1, 2007, before the great recession. In hindsight, the title of the article along with the date noted above when it appeared in that newspaper, “Investing is very much like gambling. The big difference is time” is more telling than the article itself. Let us explain.
On February 1, 2007 the Standard & Poor’s 500, the largest 500 publicly traded companies domiciled in the United States, representing approximately 85% of the total stock market capitalization, closed at 1,445.94 only to then plummet 769.41 points or 53.21% to 676.53 over two short years (March 9, 2009). Furthermore, it wasn’t until the close of business on September 13, 2012 that this index recaptured that prior high closing at 1,459.99. The final number before we draw our conclusion is to note that the S&P 500 closed this past Wednesday at 2,700.
The moral of the above matches exactly the title of our column and is borne out by the fact that from February 1, 2007 thru this past Wednesday the S&P 500 has returned a total of 87.73% or an average of 5.46% per year, not including dividends – this over a period that encompasses one of the worst bear market in history. Should we add in dividends the figure would have been approximately 7.00% per year, not too shabby.
The data noted above as well as other a wealth of additional empirical data supports the statement that unlike gambling where the chance of winning diminishes as time passes, the odds of positive investment returns by investing in equities increases as time passes. And therein lies the difference.
We bring this up because too many investors react to headlines resulting in them being whipsawed by periods of greed followed by panic attacks. It is no wonder that, according to a study by DALBAR, a company that develops practice standard for the financial services industry, the average U.S. stock investor has trailed the market by anywhere from three to seven percentage points per year over the past twenty years. To put this into perspective, over the twenty year period ending December 31, 2017 $10,000 invested in the S&P 500 would have grown to $439,334 whereas $10,000 invested by the average investor accumulated to only $254,916 respectively. It is obvious that the cost of responding to fear and greed rather than establishing and then maintaining a long-term investment strategy can be great.
We recommend that our readers become investors rather than traders. Don’t concern yourself with what will occur in the stock market over the next week, month or even quarter. Rather, concern yourself with what you believe will be the direction of stock prices over the next one to three years. Become an investor. Tune out the “halftime report” of each trading day. Tune off “market wrap.” Tune off news teasers like “you can’t afford to miss these earnings releases.”
Assuming that you agree with the above and are an investor rather than a trader, make certain that you diversify your holdings across four to six different industries. You therefore will be able to weather any unexpected downturn in a particular sector.
A third recommendation that may help you invest more profitably over time is to realize that you will not be right all of the time. However, the important factor is to be right over time. Once again, don’t appraise your portfolio on a daily basis. It becomes not unlike weighing yourself every day. You will never be happy, eventually become exasperated and give up. Measure your performance versus appropriate indices over time and recognize that you will make errors.
What matters during periods of consolidation is that you exit with the right portfolio. Simply put, when evaluating your portfolio you must assess the potential of your holdings in addition to the recent results. For example, do you own the companies with earnings growth potential? Do you own the companies that are increasing their share of the market? Do you own the companies with a proprietary product or service?
Continue to dollar cost average, investing on a systematic basis through your company sponsored pension plan such as 401(k) or 403(b). Assuming that you are allocated appropriately between stocks and bonds to meet your longterm objectives, it is imperative that you do not make major changes to your investment patterns during periods of market downturns.
Finally, upgrade your portfolio to industry leaders. Do not accept the marginal investments that might you currently own. Trade up.
Please note that all data is for general information purposes only and not meant as specific recommendations. The opinions of the authors are not a recommendation to buy or sell the stock, bond market or any security contained therein. Securities contain risks and fluctuations in principal will occur. Please research any investment thoroughly prior to committing money or consult with your financial advisor. Please note that Fagan Associates, Inc. or related persons buy or sell for itself securities that it also recommends to clients. Consult with your financial advisor prior to making any changes to your portfolio. To contact Fagan Associates, Please call 518-279-1044.