Can Long-Term Investing Work?

Proponents of long-term investing would cite examples such as the 6% per-year growth rate in the Straits Times Index (SGX: ^STI) since 1988 to show that it works. On the other hand, critics can pull out a chart of the STI showing its level from May 2007 till now and point out that the index has gone nowhere, as shown in the graph below. If six years of investing has yielded nothing, how can long-term investing work?

can long term investing work

Source: Yahoo Finance

The fallacy in the argument though, was that an investor would invest only once, i.e, at the start of May 2007, and not put in a single dime more into the market.

Indeed, for an investor who theoretically placed $72,000 into the STI on 2 May 2007 – practically, he could have invested in index trackers like the SPDR STI ETF (SGX: ES3) and Nikko AM Singapore STI ETF (SGX: G3B), both of which would mimic the STI’s movements very closely – he would have seen his portfolio become…. $71,752.

That’s right, all that money would have done nothing to increase his wealth. To add insult to injury, inflation would have chipped away at his capital with an invisible but ever-so-real axe.

But, what if a second investor had spaced out his buys? Instead of plonking $72,000 into the market in one shot, an investor who put $12,000 to work at the start of May for every year since 2007 would have a portfolio that stands at $86,686. That’s a cumulative return of 20.4% on a total investment of $72,000, a big improvement over the stagnant portfolio for the first investor.

It gets even better for the third investor who invests $1,000 at the start of every month starting from May 2007. His portfolio would be worth $88,734 now and his total investment of $72,000 would have grown by23%.

To be fair, the returns for the second and third investors are nothing to rave about. But, they sure have eclipsed what we can get from our CPF and bank-savings accounts. So, that’s still worth some credit for those in the long-term investing camp.

At its core, when we put all valuation-considerations aside, long-term investing is not just about buying at one point in time, and then forgetting about it. It’s also about investing regularly and then holding these positions through time, where we can let compound interest work its magic.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chong Ser Jing doesn’t own shares in any companies mentioned.