Tips for long-term investing in an uncertain economy
Most investors classify themselves as long-term investors, but at the first sign of trouble most investors also are usually ready to push the sell button. This irrational behavior is frequently cited in reviewing mutual fund flows. For example, in a 20-year study from 1984-2003, mutual fund investors, as a group, experienced lower accumulated returns over this time period than an individual who had just bought and held a position over this whole time period.* More recently, during the year 2009 when the stock market bottomed following its 38 percent plunge in 2008, over 90 percent of inflows into mutual funds occurred into fixed-income funds and not into stock-based funds.** Many investors have also been concerned because of the “lost decade” for stocks from 2000-2010 as the stock market (the S&P 500) was at the same level at the end of this time period as it was at the beginning of this time period. Their concerns are based on the belief that the investment strategy of “buy and hold” could be dead.
- What has history taught us? Since 1937, the market has been up 67 out of 74 ten year periods. The only ten-year periods in which the market did not generate positive returns were the ten years ending 1937, 1938, 1939, 1940, 2008 and 2009.*** Including dividends, the average return over ten years since 1937 has been 127 percent.
- Today, many individuals would point to the uncertainty surrounding the fiscal cliff, the debt problems of the Euro Zone, a potential slowdown in China, and other issues as reasons why the stock market could decline over the next few days, months, or years. Yes, these problems could arise and cause a stock market decline in the future. Yet, did the future appear clear on December 6, 1941? Or on October 18, 1987? Or on September 10, 2001? The future is uncertain over a wide range of possibilities that you may or may not have contemplated. If you owned a great business in New England with solid free cash flows, limited amounts of debt, and a sustainable business model, would you sell it because Greece might default on its debt within the next couple of years? No! However, investors have this mistaken belief that they must do something with the stocks that they own because of an event that may or may not happen in the future. Instead, investors should focus on purchasing good companies at reasonable valuations.
- In his 1994 bestseller Beating the Street, Peter Lynch wrote: “If you'd added $1,000 to your initial outlay [of $1000 in the S&P 500 Index on January 31, 1940]every January 31 throughout those same 52 years, your $52,000 investment would now be worth $3,554,227. Finally, if you had the courage to add another $1,000 every time the market dropped 10 percent or more (this has happened 31 times in 52 years), your $83,000 investment would now be worth $6,295,000. Thus, there are substantial rewards for adopting a regular routine of investing and following it no matter what, and additional rewards for buying more shares when most investors are scared into selling.****
*Braverman,Oded, Shmuel Kandel and Avi Wohl. Spet 2005. Centre for Economic Policy Research. 10 Dec 2012. <http://www.cepr.org/pubs/new-dps/dplist.asp?dpno=5243.>
**Brouwer, Kurt. Mutual Fund Flows Favor Fixed Income. 29 Nov 2009. Marketwatch. 10 Dec 2012. <http://blogs.marketwatch.com/fundmastery/2009/11/29/mutual-fund-flows-favor-fixed-income/.>
***Lichtenfeld, Marc. Why Investors Shouldn’t Worry About the Next Ten Years. 22 Aug 2012. US News. 10 Dec 2012. <http://money.usnews.com/money/blogs/the-smarter-mutual-fund-investor/2012/08/22/why-investors-shouldnt-worry-about-the-next-ten-years.>
****Lynch, Peter. Beating the Street. Simon and Schuster. May 1994.
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