How does one take thousands of dollars each year, proverbially bury that money in the ground, and then assume that the money will multiply tenfold in the subsequent 30 years? The simple answer: long term investing takes faith.
Countless what ifs…
What if the economy falters? What if companies fail, your real estate market declines, or your investment advisor makes the wrong picks? There are countless scenarios that could spell ruin in your long term investing. Heck! Who says you’ll even live those 30 years to see the assumed investment profits?
Sell everything! Spend now!
Don’t do that. Tyler Socash (see his awesome TED talk here) recently told me the advice that his financial advisor gave him.
“There’s a balance,” he explained, “On one side, tomorrow is never promised. You should spend money today on the people and activities you love. But at the same time, you’ve got to consider the reality that you’ll likely live a long and healthy life, and that you’ll want to retire at some point.”
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So that’s why you would want to invest. There’s a “likely reality” that you’ll end up wanting to retire, and you’ll want to have some money saved up.
But how to maintain faith that your long-term investing will actually appreciate, or increase, into more money than you have today? How do you combat the fear that your bets might backfire?
The Fulton Chain of Lakes
This genesis for this article popped into my head as I lay on a hammock on Fourth Lake, in New York’s Adirondack Park.
It was a beautiful sunny day. Loons called from the crystalline waters. My dog, Sadie, chased squirrels through the wooded undergrowth. The eastward winds pushed waves and sailboats alike.
Those wind-blown waves belied an interesting detail. The waves of Fourth Lake were clearly flowing eastward. Yet all hydrology data notes that Fourth Lake drains westward into Third Lake, and that the entire Fulton Chain of Lakes flows westward into Lake Ontario.
In the short term, winds and boats and thirsty dogs can push Fourth Lake’s waters in any number of directions. But over the long term, gravity will always win out. The lake will slowly drain westward through the Moose River, the Black River, and into Lake Ontario.
The long term trend is clear and obvious and unavoidable, despite what I witnessed from my comfy hammock. The short term “what ifs” I witnessed were small—and ultimately inconsequential—deviations from the clear trend.
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Markets Behave Like Those Lakes
At least up to this point in human history, investment markets have acted like my experience on Fourth Lake. While short term stimuli can push the markets in any number of directions, long term investment trends show clear upward tendencies.
For example, let’s look at this detailed examination of 100 years of stock market returns. Here’s one of the many charts from that post. This one shows portfolio values assuming that an investor contributed $100 per week for 30 years (a total of $156K invested).
At worst, someone who invested from 1953 to 1983 would have turned their $156K investment into $500K. That’s the worst case. That’s why investors have faith that their long term investments will have positive returns.
The market will wax and wane. The westward-flowing Fourth Lake can temporarily flow east. The actual data will overshoot and undershoot the trend-line average.
I bet some investors were pretty worried about their “buried money” in 1957, and 1962, and 1966, and definitely in 1970 and 1974. But by the time this particular 30-year period ended, the S&P 500 was at a level 800% higher than where it started.
Long term investing is based on this idea. Eventually, the market “flows up.”
“But it can’t go up to infinity, right?!”
Right. The stock market cannot go up forever. Eventually, the slow heat-death of the universe will ensure that the stock market has a finite cap.
Sorry, that was facetious. Here’s a serious answer.
It’s easy to look at the past 100 years of economic growth and think, “How could this ever continue at this rate? Surely we’re plateauing, right?!” But many experts—and some non-expert blog authors—think there’s still plenty of room for useful economic growth.
For example, I would argue that poverty is still an issue, both in the U.S. and around the world. Efforts to raise the impoverished out of squalor would, by definition, involve economic growth.
Or take a look at the current “green revolution” that’s occurring in the energy sector. Solar and wind power are rapidly becoming cheaper alternatives to carbon-based energy. This is an example of the “creative destruction” that ultimately leads to economic growth. Good ideas get replaced by great ideas, and the society as a whole benefits (or should benefit).
These ideas play into my faith in long term investing. As long as humans remain curious enough to build better stuff, our economies will continue to grow. And thereby, our long term investments will grow.
(End Times of) Long Term Investing
Faithful readers, it’s time to say “Amen” on this article.
Investing, like a wave, is full of up-and-downs, back-and-forths. It takes a degree of faith to believe that your long term investing will pan out, especially amid the proverbial roil.
If (and certainly when) the tides turn, I hope this post gives you the credence and conviction to see the light and continue your long term investing plan.