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99% of Long-Term Investing Is Doing Nothing; the Other 1% Will Change Your Life

peace still doing nothing lake

French military leader Napoleon’s definition of a military genius was, “The man who can do the average thing when all those around him are going crazy.” It’s the same in investing.

Building wealth over a lifetime doesn’t require a lifetime of superior skill. It requires pretty mediocre skills – basic arithmetic and a grasp of investing fundamentals – practiced consistently throughout your entire lifetime, especially during times of mania and panic.

Most financial advice is about today — what should I do now, what stocks look good now. But the vast majority of the time, today isn’t that important. It’s just buying and waiting. Most of what matters as a long-term investor is how you behave during the 1% of the time everyone else is losing their cool.

To demonstrate this idea, let’s use Yale economist Robert Shiller’s market data for American stocks going back to 1900. We’ll be looking at three hypothetical investors: Each has saved $1 a month, every month, since 1990.

The first is Betty. She doesn’t know anything about investing, so she dollar-cost averages, investing $1 in the S&P 500 (an American market index) every month, rain or shine.

Sue, a CNBC addict, invests $1 a month into the S&P, but tries to protect her wealth by saving cash when the American economy is in recession, deploying her built-up hoard back into the market only after the country’s economy officially exits a recession.

Bill, a unit trust manager whose only incentive is to look right in the short run, invests $1 a month, but stops investing in stocks six months after a recession begins in the US, and only puts his money back into the market six months after a recession ends.

After 113 years of investing, who’s won? Boring Betty takes it by a mile:

chart of dollar cost averaging

What’s really fascinating about these numbers is that of the 1,353 months since 1900, only 321 of them have been altered for Sue and Bill, because that’s the number of months the US economy has been in recession.

If you dig further into the numbers, you’ll see that a much smaller percentage of months make up the bulk of the difference in returns. Ten percent of months explains two-thirds of the difference between dollar-cost averaging and sitting out during recessions. Five percent explains more than half.

According to analyst Eddy Elfenbein, over the last 20 years, the 24 best days accounted for the entire gain in the S&P 500. “The other 99.5% of the time has been a net loss.”

That’s not just an American phenomenon. In a similar study done by Fool Singapore writer Chong Ser Jing, missing the 10 best days over the past 21 years since May 1992 in Singapore’s stock market benchmark, the Straits Times Index (SGX: ^STI), would have turned an annual gain of 3.48% into only 0.12%. In other words, missing the 10 best days out of more than 5,000 trading-days in the Straits Times Index resulted in close-to-zero returns.

Coming back to the American market, every one of its top days took place during periods of sheer terror. Of the 20 best market days of all time, 17 were during the Great Depression, one was a few days after the crash of 1987, and two were during the depths of the 2008 financial crisis. Missing these days devastated investors’ long-term returns.

And most investors who missed them were those who sold out, or stopped buying, after stocks crashed and everyone around them were busy panicking. Those who try to avoid losses consistently end up missing even larger gains. That’s why Boring Betty, who is average all of the time, ends up above average overall.

A pilot once described his job as “hours and hours of boredom punctuated by moments of sheer terror.” Thing is, investing can be thought of as the same way. Your success as an investor will be determined by how you respond to punctuated moments of terror, not the years and years spent on cruise control.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. This article was written by Morgan Housel and first published on fool.com. It has been edited for fool.sg