How long is long? To quote this famous investor that I'm sure you would have heard of even if you live in a cave, Warren Buffett:
"If you aren't thinking of owning a stock for 10 years, don't even think about owning it for 10 minutes"
In general, long term means minimally 10 years or more.
Throughout the course of my work, it's pretty common almost 8/10 clients I meet will think this is unreasonably long. Let me explain why long term investing is how financial products are structured and almost every financial advisor will tell you the same.
1. Historically, most markets appreciate over time
Just like I wouldn't fathom China would go back to the days of a perpetual president aka Emperor in Xi Jinping, there might be possibilities in investing that might change future performance. For now though, historically most markets appreciate over time. Let me show you.
S&P 500
FTSE 100
Hang Seng Index
Nikkei 225
I deliberately picked the most popular markets as these are the common markets discussed whenever you read financial news. You can see that even though there's up and down movements, markets are generally upward trending. This is because societies have been progressing as a whole and the stock markets generally reflect this. Basically, if your parents invested in these markets since you were born, chances are they probably can give you a big angbao at your 21st birthday or a hefty wedding gift.
2. You don't need to time the market to make money
Generally, I'd say that even the best investors can't time the market to precision. Almost no one can buy at the exact bottom and sell at the top all the time. Likewise, when it comes to stock picking, even famous people like Warren Buffett can make mistakes. Investing long term simply takes away this stress and cushions the market risk by a lot. Do take note though, that I'm referring to markets broadly. When it comes to individual stock picks or tactical funds in specific industries, it's trickier. That's also why long term investing is usually associated with global funds or having a balanced portfolio.
MSCI World Index
Let's take investing in a global index for example. I'm just using this for illustration. You will likely need to buy into an ETF or a mutual fund to track the index. Different people might be investing at different timings. Some may buy in late after the markets have rallied because they want to be very sure that markets are upward trending. Some might have bought in 2007 just before the Lehmann Brothers crisis and they might bought at the peak of that prevailing trend. Some might be lucky and bought in during a market pull back and got in at lower valuations. If we go by the narrative that we should invest long term, we can see that regardless of whether people bought high or low, what eventually happened was still markets heading higher. Yes, in this example, way beyond the peak before Lehmann Brothers crashed.
If markets will appreciate overtime & we don't need to time the market, then why does investing still feel risky?
For starters, remember I said 8/10 people will think long term investing is unreasonable? They think they are investing but in actual fact, what they want is to speculate the market. If ever I give a client a choice of how long their investment horizon is, they would say, "maybe 1 to 3 years?" You then need to question why 1-3 years and most of the time, it's just psychological. Short feels safe and good. Most people evaluate their investment results as shortly as 1 year. There's also the psychological element which investing long term generally helps avoid. Let me explain.
Let's explore some of the most unlucky scenarios. Imagine John is the unlucky one to have entered at any of these arrows in the green squares. John monitors his investment regularly and after a year or two, he becomes dead certain that he has no luck in investing because all he sees is a drop in his investment capital. If he is like most people who expects to invest for 1-3 years, then John might liquidate his investment and realize the deficit. To put it in perspective, in investing, the risk is generally lower if one has holding power. Having said that, this is an extreme scenario. There's a lot of people who invests at points outside the green boxes and their overall perception would be a lot different.
To understand the psychology that most people encounter, let's dive deeper. Imagine John invested in year 2000, what he would really have experienced was a downward trend for about 2-3 years. To John, if the downward trend can be on-going for 2-3 years, then it might be possible that it is prolonged. Given that he can't foretell the future at the point of evaluating, the mind tend to favour negative and scary thoughts. John might believe that markets will dip for 10 years even. So many times, people encountering this might choose to exit the market.
Yet, right after he exited the market, the market went back up. In fact, it went past the highs of when John originally entered. Have you ever heard people say things like, "whenever I invest, the market will go against me."
So John after seeing the market roar past his original investment price, was determined to enter the market again. Let's assume he is really suay, he entered again in 2007 and he saw the price tanked again! This time round, the drop was very steep. Once more, he cannot see what the future trend looks like but once again, he imagines the worse and expects the market to drop non-stop. We all know what happened next, John liquidated his investment and the market rallied.
Now, I know what you are thinking. Nobody would like to invest in something to wait 7-8 years for it to turn green. It's true, that's why this projection is positioned as the worse case. All I'm trying to illustrate is because most markets are upwards trending, long term investing can put the odds in the investors' favour as long as they can wait. Plus, it's not easy to buy at the peak of a trend you know? Most of the time, people buy when markets are in the midst of dropping or upwards trending, not at the peak. If you look at the graph, if someone invested at various points outside the green boxes, the person would experience long periods of positive gain. In fact, did you notice that each down period is shorter than each rally?
Do you know you might still lose money in upward trending markets?
So previously, I highlighted the worse case scenarios which is buying at the peak of the previous trend. What if you bought in during an upward trending market? Let's examine the psychology if John invested in 2018. From the chart shown, we can see some side way movement. In investing terms, I'd say that markets are in a small range. This is normal in an upward trend because there's no market that moves in a perfect straight line.
However, if John chooses to evaluate his investment within a one year time frame like basically 90% of my clients who invests, John might interpret that the trend is changing and he should exit because he got in at the wrong time. This is ultimately a very common interpretation if you aren't accustomed to market movements. Essentially, the image above zooms in on a shorter time period which screws up most peoples' investing psychology. Let's face facts, at the point of entering the market, there's no way anyone will know if a sudden event can cause short term volatility like this Coronavirus. However, long term, markets have a strong tendency to grow progressively and recover from global issues. This is also one reason why it's important to get an advisor to hand-hold you through your investing journey if you are susceptible to react to every big/small market news.
So if we zoom out to the bigger picture over a longer period of time, the drop in prices is temporary and in fact, markets continued its upward momentum till now.
What can we learn from this?
1. We are encouraged to invest long term because most markets move progressively forward in the long term.
2. You can still make money even when you enter at peaks as long as you have a long enough holding power.
3. If you trust that point 1 & 2 are true, then even if you can't see what's happening next in the market, you should not emotionally give in to fear and liquidate at the low. At least seek advice first.
4. Do not evaluate your investment within a 1 year window, it's too soon and what you see might not be a true representation of the big picture.
Summary
In short, this is a very brief explanation why we are constantly told to invest long term. I'd like to point out that this explanation does not take into account rebalancing of the investment which I'm a big believer of and I also acknowledge that watching a negative return for more than 2 years with blind faith that this particular investment will trend upwards is a bit too optimistic. Usually a buy and hold strategy is applicable to a portfolio and not a singular counter. The more specific and narrow the investment scope, the more attention is required. I would say that in a real-life setting especially in advisory, hand-holding the client through the process is important and constant interaction should exist.
Should you decide to get started on your investing journey, do speak with a trusted advisor. Alternatively, you can drop me a message if you would like me to help you with it.
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Disclaimer: The content created are based on my personal opinions and may not be representative to everyone or any organisation. If you have any doubts or queries pertaining to insurance or investment, please seek professional advice from a trusted adviser in an official setting. You may also reach out to me if you do not have a present adviser using the message box under 'Let's Talk'.
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