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Why Long-Term Investing Gives You the Best Odds of Success

As of last Friday’s (13 Sep 2013) close of 3,120 points, we’ve seen the Straits Times Index (SGX: ^STI) shed 10% of its value from its 52-week high of 3,465 that it crested barely four months ago on 22 May 2013. That might naturally bring out the jitters for stock-market participants who are worried that this correction is far from over.

Some might be scared to invest, hoping to come back at a ‘less-volatile’ time. But for long-term investors who have a time-horizon measured in decades, this might just be a blip in the grand scheme of things. To illustrate why, I dug into historical data, collated from Yahoo Finance, for the STI stretching back to 1988.

Let’s consider an investor who ploughed money into the STI at the start of every month starting from 1988. From then till now, that would represent 189 rolling-10-year periods. Out of these 189 periods, here are some of the important statistics related to the returns the investor would have gotten (dividends not included):

  • Proportion of losing periods: 35 out of 189 (or 18.5% of the time)
  • Average total return over all 186 periods: 42.3%
  • Worst return: -28.8%
  • Best return: 219.9%

An investor stands a great chance of ending any 10-year period with more cash than his initial outlay (unadjusted for inflation), but can still suffer losses of almost one-third of his capital. So, it’s certainly fair-game for anyone to doubt long-term investing if they’re laser-focused on preservation of capital.

But, what happens if we now look at rolling 20-year periods instead, of which there are 69 of them starting from 1988? Let’s find out:

  • Proportion of losing periods: 0 out of 69
  • Average total return over all 69 periods: 110%
  • Worst return: 42.9%
  • Best return: 240.5%

Looking at these numbers, two things jump to mind.

First, the longer you stay invested, the better the chances of coming out ahead. Being invested for 10-years entails an 18.5% chance of losing money, with losses that can amount to almost one-third of our capital. But, once we stretch that holding period to 20 years, the chance of losing money diminishes greatly.

Plus, the returns that an investor can get would have increased as well, judging from the average total return of 42.3% for the rolling 10-year period as compared to the rolling 20-year period’s corresponding return of 110%.

Second, it is generally a bad idea to invest in a narrow frame of time. If we observe the data for both the rolling 10-year and 20-year period, we can see that the there’s a huge discrepancy between the Worst Return and Best Return figures. What this means is, two investors can have vastly different results at the end of 20 years depending on when they started. That’s why it might be better for investors to invest regularly as compared to investing all available funds in a short span of time.

Foolish Bottom Line

Investors sometimes get spooked out of the market when they see falling prices and hope to dance in and out of the market opportunistically. The thing is, the faster they dance, they more they lose.

It’s unfortunate if they can’t stay the course of investing for the long haul, especially when the odds of success for long-term investing are clearly in their favour.

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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.