Time is one of the investor’s greatest allies. Renowned investors like Warren Buffett and Peter Lynch have waxed lyrical and preached ad nauseam on the benefits of patience and the merits of staying invested in the market for the long-term. Thing is, Buffett, Lynch and other investors of similar ilk are not merely espousing long-term investing for the sake it. They have good reasons for doing so and here, I’ll like to show three such reasons for you to consider about the merits of investing for the long-term. 1. The bulk of market returns are concentrated in a very small…
Time is one of the investor’s greatest allies. Renowned investors like Warren Buffett and Peter Lynch have waxed lyrical and preached ad nauseam on the benefits of patience and the merits of staying invested in the market for the long-term.
Thing is, Buffett, Lynch and other investors of similar ilk are not merely espousing long-term investing for the sake it. They have good reasons for doing so and here, I’ll like to show three such reasons for you to consider about the merits of investing for the long-term.
1. The bulk of market returns are concentrated in a very small number of days. Staying invested for long stretches of time thus increases your chances of being ‘in’ the market during its best days.
John Bogle, founder and former Chief Executive Officer of American mutual fund giant The Vanguard Group, wrote in a paper titled Black Monday and Black Swans that “the [S&P 500 index] has risen from a level of 17 in 1950 to 1,540 [on Oct 2007]. But deduct the returns achieved on the 40 days in which it had its highest percentage gains – only 40 out of 14,528 days! – and it would drop by 70 percent, to 276.”
And Tweedy, Browne, a renowned value-investing firm in the USA have also concluded in a paper titled 10 Ways to Beat an Index that (emphases mine), “empirical research has shown that 80-90% of investment returns have occurred in spurts that amount to 2%-7% of the total length of time of the holding period. The rest of the time, stocks’ returns have been small.”
In essence, market returns are mundane most of the time with big jumps occurring infrequently. So, the odds of an investor being able to capture huge gains by flitting in and out of the market are really small.
2. Historical precedents show us that the odds of losing in the stock market dramatically decrease the longer we hold our shares.
Consider an investor who invests in the Straits Times Index (SGX: ^STI) at the start of every month since Jan 1988. The three charts below show the returns (without adjusting for inflation) he would have gotten for a holding period of one year, 10 years, and 20 years respectively.
It’s instructive to see that, when the holding period is doubled from 10 years to 20 years, chances of a loss are dramatically reduced. And even for a holding period of 10 years, the odds of making losses are much smaller than a holding period of one year.
It goes to show how time can be a powerful ally in winning the investing game.
3. Investors could have achieved returns in excess of 1000% in certain companies over 10 years simply by buying and holding
In Singapore’s market, shares like instant beverage manufacturer Super Group (SGX: S10), conglomerate Jardine Strategic Holdings (SGX: J37) and retailer Dairy Farm International (SGX: D01) have all gone on to log returns of more than a 1000% since the start of 2003.
These businesses had growing profits and dividends over the years and became more valuable as a result but for investors without patience, those outsized returns would not have been possible.
Foolish Bottom Line
Too few investors realise the importance and advantage that ‘time’ can confer on to their returns. Of course, it’s not always the case where having patience and a long-time horizon would guarantee that you come out ahead.
But, by and large, with proper investments made in companies that carry the ‘secret sauce’ that allows them to grow even while others are floundering, it really can be as simple as letting time do its work.
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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 owns shares in Super Group.