Tag Archives: Long-Term Investing

Stay Invested – Time in the Markets

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“Time in the markets, not timing the markets.”

A common mantra in investing circles is ‘it’s about time in the markets, not timing the markets’. In other words, the best way to make money is to stay invested for the long term, rather than worrying about short term volatility or whether now is the best time to invest.

Value investing guru Benjamin Graham once quipped that “in the short term the stock market is a voting machine” that measures the popularity of companies and the sentiment of investors, whereas in “the long term it is a weighing machine” that measures each company’s fundamentals and intrinsic value.

Time in the market works because it takes this ‘guess the market bottom’ element out of the equation. By focusing on the long term, it’s easier to ignore the volatility of markets. Sure, it’s still scary watching the value of your share portfolio fall from time to time.

Time in the market is really about harnessing the power of compound interest. Compounding is the best thing about investing. Albert Einstein once said “Compound interest is the most powerful force in the universe. Compound interest is the 8th wonder of the world. He who understands it, earns it, he who doesn’t, pays it.”

With compounding, your money accumulates a lot faster because the interest is calculated in regular intervals and you earn interest on top of interest. Compounding is usually what makes investors like billionaire investor Warren Buffett wealthy. If you are able to achieve a consistently high annual rate of return over the long term, building wealth is almost inevitable. And Buffett has never tried to time a market in his life.

But pushing and pulling your money in and out of the market stymies the compounding process. And all it takes is one massive mistime to end up back at square one given the fact that market can never be timed. Investor Peter Lynch said it best: “Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in the corrections themselves.”

Compounding plays a pivotal role in growing your wealth. When using compounding, the results will be small at the start but over time, your wealth will accumulate fast. Warren Buffet is known to make the majority of his wealth later in his adult life and this is due to the compounding interest effect on his assets and invested capital.

Missing the best days

Timing the markets involves trying to second-guess the ups and downs, with the hope that you will buy when prices are low and sell when they are high. This can be lucrative if you get it right consistently, but this is very difficult to do and getting it wrong means locking in losses and missing out on gains.

Not only is timing the market difficult to get right, it also poses the risk of missing the ‘good’ days when share prices increase significantly. Historically, many of the best days for the stock markets have occurred during periods of extreme volatility.

Instead of trying to time the market, spending time in the market is more likely to give you better returns over the long term. It is best to base your investment decisions on the long-term fundamentals rather than short-term market noise and volatility.

Value of $10,000 investment in the S&P 500 in 1980

Source: Ned Davis Research, 12/31/1979-7/1/2020.

This chart uses a series of bars to show that from the end of 1979 until July 1, 2020, a $10,000 investment would have been worth $860,900 if invested the entire period. Missing just the 10 best days during that period would reduce the value by more than half, to $383,400.

Anybody who pulls money out in the early stages of a volatile period could miss these good days, as well as potentially locking in some losses. For instance, between May 2008 and February 2009 in the depths of the global financial crisis the MSCI World index dropped by -30.4%. By the end of 2009 it had bounced back +40.8%.

References:

  1. https://www.edwardjones.com/us-en/market-news-insights/guidance-perspective/benefits-investing-stock
  2. https://www.fa-mag.com/news/retirees-are-leading-precarious-financial-lives-42426.html
  3. https://www.tilney.co.uk/news/it-s-about-time-in-the-markets-not-timing-the-markets
  4. https://www.fool.com.au/2020/10/06/does-time-in-the-market-really-beat-timing-the-market/
  5. https://www.fool.com.au/definitions/compounding/

Investing for the Long Term

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“For investment success and above average returns, investors should invest and grow their money over the long term.”

Long-term investing is the best way to build wealth and is a strategy that has for decades withstood the test of time. It’s instrumental in planning for retirement and building wealth and a legacy. Long-term investing require patience and has the potential to pay off with a much higher returns.

Long-term investing is the practice of buying and holding investments like stocks for many years and decades. The exact definition of how many years or decades you must hold an investment for it to qualify as a long-term investment varies. Generally, it is between ten and twenty years, though it can be much longer.

“Investors would be better off…to just keep their investments long-term and not worry about what happens in the short-term. It’s the hardest thing to do, but sitting on your hands and staying long-term focused pays the highest dividends.”  Mark Matson

Common sense says that long-term investing is more conservative. Sometimes that’s true, but not always. You can invest in the stock market, generally considered one of the riskier investment assets, with the intention of holding the stocks for the long term. There is still a good amount of risk involved even though it’s technically a long-term investment if you hold the stocks for a longer period of time.

Patience

Long-term investments require patience. That patience is a trade-off for potentially lower risk and/or a higher possible return. You aren’t going to see the quick increases in portfolio value and it isn’t always going to be the most exciting type of investing.

It’s important to keep your eyes on long-term goals (or prize) like retiring, paying for your education and passing on some of your wealth to your family.  “Investors need to stay focused on the next 10 to 20 years, not the next 10 to 20 minutes,” says Mark Matson, veteran market strategist of Matson Money.

Investors hold long-term investments for a period of several decades. Long-term investing is about buying and holding securities rather than selling at the first sign of profit.

Long-term investing is about patience and waiting out volatility, corrections and bear cycles. You have to focus on how an investment will appreciate down the road. There are a number of possible long-term investments you can make. Just think about your own financial situation before deciding which of them is right for you.

Market declines can be unnerving. But bull markets historically have lasted much longer and have provided positive returns that offset the declines. Also, market declines often represent a good opportunity to invest. Strategies such as dollar cost averaging and dividend reinvestment can help take the emotion out of your investing decisions.

As the chart below illustrates, no one can accurately “time” the market. An investor who missed the 10 best days of the market experienced significantly lower returns than someone who stayed invested during the entire period, including periods of market volatility. Staying invested with a strategy that aligns with your financial goals is essential.

Missing the best days

Value of $10,000 investment in the S&P 500 in 1980

Source: Ned Davis Research, 12/31/1979-7/1/2020.

Successful long term investing equates to decades and is extremely boring.

The path to build wealth required you to take the laziest, simplest approach to stock investing imaginable, and have a little patience. Ever since Vanguard introduced its S&P 500 index fund 45 years ago, ordinary investors have been able to invest in broad stock indexes in a tax-efficient manner, with extremely low fees.

Investors who committed to large-cap stocks of the S&P 500 index for 35 years saw returns equal to or higher than the long-term return (94 years) of 10.2% in 87% of the rolling 35-year periods between 1926 to 2019 (there were 60 of them), according to Barron’s.

If only investing for 30 years, returns were 10.2% or higher in only 74% of the rolling 30-year periods. It falls to 60% when the time frame is 25 years.

The historical success rate of achieving the long-term return also increased for investors willing to stay in the saddle for at least 35 years. In general, if an investment portfolio has at least a 60% equity allocation, the needed investment period is at least 25 years to have a 70% or higher chance of achieving the long-term return.

Long-term investing means holding stock in a portfolio for a period of at least 10 to 35 years.  Long term investing represents some of the best investing advice investor should heed.  Investors need to stay focused and base their investment decisions on the next 10 to 30 years, not the next 10 to 30 days.

The power of compounding

Compounding can work to your advantage as a long-term investor. When you reinvest dividends or capital gains, you can earn future returns on that money in addition to the original amount invested.

Let’s say you purchase $10,000 worth of stock. In the first year, your investment appreciates by 5%, or a gain of $500. If you simply collected the $500 in profit each year for 20 years, you would have accumulated an additional $10,000. However, by allowing your profits to stay invested, a 5% annualized return would grow to $26,533 after 20 years due to the power of compounding.

“Good investing isn’t necessarily about earning the highest returns…It’s about earning pretty good returns that you can stick with and which can be repeated for the longest period of time”, according to Warren Buffett. “That’s when compounding runs wild.”

Tax control advantages

Investing is a terrific way to build wealth and financial security, but it’s also a way to create a hefty tax bill if you don’t understand how and when the IRS and state tax departments impose taxes on investments.

  • Tax on capital gains – Capital gains are the profits from the sale of an asset — shares of stock, a piece of land, a business — and generally are considered taxable income. Essentially, the money you make on the sale of any of these items is your capital gain.
  • Tax on dividends – Dividends usually are taxable income in the year they’re received. Even if you didn’t receive a dividend in cash — if you automatically reinvested your dividend to buy more shares of the underlying stock, such as in a dividend reinvestment plan (DRIP) — you still need to report it. And, there are generally two kinds of dividends: nonqualified and qualified. The tax rate on – nonqualified dividends is the same as your regular income tax bracket. The tax rate on qualified dividends usually is lower.
  • Taxes on investments in a 401(k) – Generally, you don’t pay taxes on money you put into a traditional 401(k), and while the money is in the account you pay no taxes on investment gains, interest or dividends. Taxes hit only when you make a withdrawal. With a Roth 401(k), you pay the taxes upfront, but then your qualified distributions in retirement are not taxable. For traditional 401(k)s, the money you withdraw is taxable as regular income — like income from a job — in the year you take the distribution.
  • Tax on mutual funds – Mutual fund taxes typically include taxes on dividends and capital gains while you own the fund shares, as well as capital gains taxes when you sell the fund shares. Your mutual fund may generate and distribute dividends, interest or capital gains from the investments inside the fund. Accordingly, you may owe taxes on these investments — even if you haven’t sold any of the shares or received any cash from them. The tax rate you pay depends on the type of distribution you get from the mutual fund, as well as other factors. If you sell your mutual fund shares for a profit, you might incur capital gains tax.

With stocks, you control when to buy and sell, and can reduce your tax burden and are very cost efficient.

You can reduce capital gains taxes on investments by using losses to offset gains. Tax-Loss Harvesting is a tool that can significantly lessen the tax burden and the pain of corrections or down markets. The primary benefit of tax-loss harvesting is you can capture current losses in your portfolio without changing the risk and return characteristics of your portfolio. These recognized losses can be used to reduce your taxes. They can be applied to up to $3,000 of ordinary income and an unlimited amount of capital gains each year. Unused losses may even be carried forward indefinitely.

Very few investors realize their true account value is the aggregate value of their securities plus the aggregate tax savings from their harvested losses (i.e. their harvested losses * their marginal federal + state ordinary tax rate). For example, if you invested $10,000 and harvested losses of $2,000, and your marginal tax rate is 40% and your account has traded down to $9,500 then you are actually above water despite appearing to have lost 5%. That’s because you should add the $800 of tax savings ($2,000 * 40%) to your securities value of $9,500 to get a total tax adjusted value of $10,300 – greater than the $10,000 you invested. This is why tax-loss harvesting provides an opportunity for an offsetting economic benefit.

References:

  1. https://smartasset.com/investing/long-term-investment
  2. https://www.barrons.com/articles/financial-advisors-tell-clients-to-invest-for-the-long-term-but-how-many-years-is-that-51604003385?mod=article_signInButton
  3. https://finance.yahoo.com/news/a-president-trump-or-biden-doesnt-matter-to-the-stock-market-just-invest-for-the-next-20-years-strategist-161541443.html
  4. https://www.edwardjones.com/us-en/market-news-insights/guidance-perspective/benefits-investing-stock
  5. https://mentalpivot.com/book-notes-the-psychology-of-money-by-morgan-housel/
  6. https://www.nerdwallet.com/article/taxes/investment-taxes-basics-investors
  7. https://www.nytimes.com/2021/02/04/upshot/stock-market-winning-strategy.html

Long-Term Investors Have Almost Always Experienced Positive Returns

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S&P 500 rolling returns have been almost always positive over the long-term.

One of the best ways to invest is over the long term and it’s more important than ever to focus on long-term investing. It’s long-term investing strategy where investors can accumulate wealth. By investing long term, you can meet your financial goals and increase your financial security.

94% of 10-year rolling returns have been positive since 2000.

Rolling returns are measured over consecutive periods starting with the earliest period and finishing with the most recent. For example, the period of measure for a 10-year rolling return for an investment as of the end of February, would be 03/01/2010 through 02/29/2020.

Source: Bloomberg Finance L.P. as of 02/28/2020. Past performance does not guarantee future results. The referenced index is shown for informational purposes only and is not meant to represent the Fund. Investors cannot directly invest in an index.

Investing and learning to think long-term

While many investors of all ages think of investing as trying to time the market to make a short-term return on their investment, investing for the long-term investing is one of the best ways and a proven strategy for investor to accumulate wealth over time and achieve financial security. But the first step is learning to think long term, and avoiding obsessively following the markets daily ups and downs.

References:

  1. https://oshares.com/long-term-investors-have-almost-always-experienced-positive-returns/
  2. https://www.bankrate.com/investing/best-long-term-investments/

Bach Wisdom—16 Timeless Truths

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16 FINANCIAL TRUTHS, ACCORDING TO DAVID BACH, YOU CAN TAKE EVERYWHERE!

Advice from David Bach, author The Automatic Millionaire

  1. Always spend less than you make – your life will be much easier and less stressful.
  2. Pay yourself first – at least an hour a day of your income – you’re going to work 90,000 hours over your lifetime you should keep at least an hour a day of your income.
  3. Don’t budget – you’re too busy, and you will just get frustrated and fail–instead automate your financial life. When it’s automatic you can’t fail.
  4. Be an investor, not a borrower – investors get rich borrowers stay poor.
  5. Buy a home, don’t rent. Renters stay poor – homeowners and landlords build wealth.
  6. Don’t lend money to friends or family (you will lose both) — and you’re not a bank.
  7. Never invest in things you don’t understand. If the investment can’t be explained to you on one piece of paper it’s too complicated. Pass.
  8. Invest for the long-term – building wealth takes decades not days.
  9. Don’t try to time the market, it won’t work. Investors who time the market always fail.
  10. Never invest on margin – leverage kills you when things go wrong.
  11. This time is different — it’s never different. Things work until they don’t work. Never bet the farm, you can lose it.
  12. Once you become rich — stay rich. It beats starting over (ask anyone who has had to).
  13. Give back — because the more you give the more you grow – and you make the world a better place.
  14. Never give up. No matter what happens, no matter how many times you fail as long as you get up and try again you haven’t lost.
  15. Compound interest really is a miracle that works when you work it. Save $10 a day at 10% interest in 40 years you’ll have $1,897,244. Earn half of that and you’ll have close to half a million dollars. That will be way better than not having saved. Trust me. Your older self will thank you.
  16. To find the money to save and invest you need to find your Latte Factor. The Latte Factor is the simple metaphor that will teach and inspire you to realize you are richer than you think and small amounts of money can change your life – if you invest it! Come check more at www.thelattefactor.com.

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These truths, according to David, have come from over 30 years of learning. Mostly from experience and also mentors. Feel free to pass them along. Peter Lynch, the genius money manager from Fidelity, definitely gets credit for #7.

Take what you love and leave the rest behind.

You don’t have to believe in them all…but, according to David, most of the truths will help you financially.

****AND SHARE AWAY****BECAUSE SHARING IS CARING.

Source: Bach Wisdom—16 Timeless Truths

David BachDavid Bach is a financial expert and bestselling financial author. He has written ten consecutive New York Times bestsellers with more than seven million books in print, translated in over 19 languages.

His book The Automatic Millionaire spent 31 weeks on the New York Times bestseller list. And, over the past 20 years David has touched tens of millions through his seminars, speeches and thousands of media appearances. He has been a contributor to NBC’s Today Show appearing more than 100 times, and a regular on The Oprah Winfrey Show, ABC, CBS, Fox, CNBC, CNN, Yahoo, The View, PBS, and many more.