Thinking Long Term: A Smooth Sea Never Made a Skilled Sailor

Investing is like charting a course through rough seas. There are risks you must navigate moment to moment and key decisions you must make over the short-term (daily, weekly, monthly etc.) if you wish to survive and reach your long-term destination. Unlike life on the real seas, most investment decisions are not life and death, and thankfully, most of the investment mistakes you will undoubtedly make along your journey can generally be overcome with the benefit of time and a strong dose of patience.

For all of us, an important aspect of wealth creation is an ability to maintain a financial course even in the face of short-term disruptions. That message has been reinforced this year as markets fell by 32% from peak to trough in the first half of 2020 only to rocket back and end the year 16% above where they started. It is only by having a long-term perspective that you can harness the power of compound interest, realize the tradeoff between risk and return and seize opportunities when they arise. This year reinforced the value of both patience and opportunity.

Franklin D. Roosevelt, our country’s 32^nd President, is quoted as saying “A Smooth Sea Never Made a Skilled Sailor.” He meant that your abilities and perseverance must be tested, and you must demonstrate the ability to take opportunities, learn from your inevitable mistakes and gain additional skills. We can extend his principle into the most important ingredient of creating financial wealth — thinking long term.

For the purpose of this article, we are focusing our comments on the traditional investment decisions you make with respect to your investment portfolio of stocks and bonds and your retirement account, such as your IRA. We are not speaking of investments you might consider such as starting or investing in a standalone business, a real estate venture, private equity investments, hedge funds or venture capital funds, as these investments have unique risk and return characteristics that live outside of traditional investments in stocks and bonds.

Celebrating 245 Years of Success

The nation will celebrate 245 years of independence on this coming 4^th of July. In reality, we will celebrate the amazing success that free markets and society have produced since our founding in 1776. Since our founding, we have overcome a civil war, presidential assassinations (e.g. Lincoln and Kennedy), World War I, a stock market crash in 1929, an economic depression during most of the 1930’s, World War II, the Korean War, the Vietnam war, civil unrest, protests and boycotts in the 60s, sky-high inflation and interest rates in the late 70s and early 80s, oil embargos, racism, sexism, discrimination, crooked politicians, the tech bubble of the late 90s, the terrorist attack on 9/11 and the Great Recession of 2008 and three 40%+ stock market corrections over the last 15 years.

We could go on and on, but through it all, Americans have not only persevered, but they have prospered which has historically made betting against the U.S. over the long term a bad bet!

The Risk of Missing the Best Days

But what about betting on the U.S. in the short-term? When the seas become rough, it’s very easy to change direction, plot a new course, or worse, jump ship altogether. It’s never easy to know in the heat of battle the best answer but when it comes to letting the latest negative headline of the day (especially in the era of a 24/7 non-stop news) influence your short-term investment decisions. This is a slippery slope as things are typically never as bad as they seem, or at least as bad as they are being reported in the news.

As we hinted at earlier, deviating from your long-term plan can be costly as we see in the chart below, courtesy of J.P. Morgan. The cost of missing just the 10 best days (over the last 20 years) is meaningful. If you invested $10,000 in the S&P 500 and “bought and held”, you earned 7.68% annually and your $10,000 investment grew to $43,933 in 20 years.

On the other hand, if you attempted to change course or jump ship, a.k.a. “get in and out” of your investment in the S&P 500, and in the process you missed the 10 best days, your return slips to 4.00% annually, for a gain of only $21,925.

If you missed the 60 best days, your return annual shrinks to a -5.76% loss! This is the potential cost of trying to time the market in the short-term and not thinking long-term. Another key point during this 20 year period is that 6 of the 10 best days occurred within two weeks of the 10 worst days. Think about that for a moment. The biggest upward surges in stock prices over the last 20 years occurred when the investing public was decidedly negative and selling pressure was strong. On Wall Street, this is known as the point in time when stocks change from weak hands (short-term thinkers) to strong hands (long-term thinkers).

There Are No Shortcuts

Creating wealth in investment and achieving financial independence is about focusing on the long-term objective and letting time be your greatest ally. As they saying goes “it’s time in the market that matters the most, not market timing”. Keeping this belief front and center is vital when financial markets turn volatile and the value of your investment portfolio has fallen. It’s even more vital when you are tempted to change course and focus your energy on the wrong things in the short run.

Achieving financial independence is a process, and a process by definition, takes time. There are no short cuts in life. It takes time to nurture children into mature and well-grounded adults; you can’t do it overnight. And it takes time for investors to grow wealth; they can’t do it overnight either.

Our best advice for creating wealth is to plot your course, be prepared for rough seas, and remember to think long term when you’re tempted to jump ship. ■