In It for the Long Haul

Over the years, I have seen some pretty bad research come out of Wall Street. I remember an analyst recommending Akamai Technologies in 1980 right at the top. As it slid a heart stopping 20% in a few weeks, the analyst “re-iterated” his buy rating. He continued to be bullish and basically said it would resume its upward movement anytime now. Finally, when the stock was down about 75% from its highs and from his buy recommendation, he threw in the towel. In all fairness, everyone, including this publication, has been wrong (think Express Scripts – Gosh, I hope it doesn’t drop 75% from its highs!)

On the other hand, the Street puts out some excellent research as well. And some of it is so elegant in its simplicity. Many of you have probably seen the charts that show the results of being out-of-the-market for the ten best days; it creates a huge performance drag. It’s a great piece of research that’s been copied by many Wall Street firms and financial advisors. Invesco put out a similar piece earlier in the year that had a slightly different spin on missing the ten best days… over the time frame from Year-end 1927 to Year-end 2016—a span of 89 years! (That’s the one flaw of the study… the time frame is so long, that no one would really be able to invest over a period of 9 decades; the typical investor’s timeframe over his lifespan is more like 30 to 40 years. Admittedly, even the shorter time frame studies show similar results.)

Invesco’s study also showed what happened if you were out-of-the-market on the ten worst days of that time period. The numbers, shown below, might surprise you.

 

Growth of $1.00 in the S&P 500, from Year-end 1927 to Year-end 2016

Days Ending Value ($) Cumulative return (%)
Total Return being in-market, all days, over 89 years 126.41 12,470
Miss the 10 best days, over 89 years 41.94 4,094
Miss the 10 worst days, over 89 years 396.55 39,554
Miss 10 best and 10 worst days, over 89 years 131.55 13,054
Cash 19.37 1,836
Sources: Invesco, Bloomberg, Morningstar

 

Staying the course for the entire time period served the investor well. If you happened to be a good enough market timer and be out-of-the-market for the crash of 1929, the crash of 1987 and other huge down-days during the financial crises, you did extraordinary. Problem is, very few people are that good at timing the market over the long run. I know some very wealthy short-term traders… but I know far more wealthy people who amassed their wealth by building it over the course of many years.

So, do what the richest people in the world do. (Carlos Slim, Bill Gates, Warren Buffett, and Jeff Bezos are the top four). Can you imagine Bill Gates or Jeff Bezos selling their Microsoft or Amazon shares to pocket a short-term gain, given what they built over the last two decades? Can you imagine Gates selling his Microsoft stake after he became a multimillionaire and leaving $85 billion on the table?

Forget quarterly guidance and short-term thinking. Hanging in there for the long-run allows you more time to enjoy life. So turn off the computer and your cell phone and enjoy the Independence Day holiday.

 

Dave Lerman / Jodie Warner

 

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