Often, the most profound act an investor can perform is nothing at all.
Examining nearly a century of data, the case for a long-term buy and hold strategy is undeniable. So today, I’ll give you four reasons why the boring path of staying invested is consistently the most lucrative.
First, volatility is part of the game. Many investors mistake volatility for a permanent loss of capital. In truth, market pullbacks are necessary for long-term gains.
Since 1928, the S&P 500 has survived everything from the Great Depression to wars to pandemics. It’s not always smooth though, since over 90% of years experience a dip of at least 5%. A correction of 10% or more occurs in nearly two out of every three years.
Second, geopolitics aren’t a reason to sell. From the Cuban Missile crisis to the Iran war, geopolitical shocks have caused market fear. But the market is durable. On average, the S&P 500’s one-year forward return after geopolitical crises is 14.2%.
Third, time is the great risk eraser. The best argument for long-term investing is the relationship between time and investments losses.
If you hold an S&P 500 fund for a single day, your chance of losing money is basically a coin flip. But if you broaden your time horizon, the risk dissipates.
Per Bank of America, the probability of a negative return drops to just 6% over a 10-year period. Over 20 years, the probability of losing money in the S&P 500 has been 0%.
Lastly, the rewards of longevity. Over time there have been some huge stock market drops, and the reward for those who rode them out has been a significant return.
Those who hold during a 30% market drop (even better, those who add to their positions in these times) have seen average five-year forward returns of 88% with a 98% win rate. The magic of compounding relies on time.
The market rewards the patient. Avoiding market timing and ignoring short-term fluctuations lets your money do the heavy lifting.
Daniel A. White is an investment advisory representative of and provides advisory services through CoreCap Advisors, LLC. Daniel A. White & Associates and CoreCap Advisors are separate and unaffiliated entities.