Why Investing Is Similar To Losing Weight

Imagine you are trying to lose some weight through a weight-loss programme. You begin excitedly by measuring your weight on a minute-by-minute basis. To your surprise, it fluctuates wildly. After an hour, you have taken 60 readings but it does not seem that you have not gotten any lighter. You conclude that this weight-loss programme is a scam and give up on it.

Yes – this might sound like a ridiculous example as we all know that it takes time to lose weight and checking your weight every minute is simply a crazy thing to do.

Yet, many investors, including the media, are obsessed over how the price of market indexes or certain shares have changed since the previous day. This happens even though most investors know that they are investing for the long-term in order to reach their financial goals years or decades into the future. In this sense, isn’t the obsession over short-term price changes the same as checking your weight at minute-intervals?

On a day-to-day or even year-to-year basis, the market is a random and volatile machine. But if we take a step back and look at how the market has evolved through the years and decades, the trend is obvious – it moves upwards.

Since 1988, Singapore’s market barometer, the Straits Times Index (SGX: ^STI), has appreciated from about 900 points to more than 3,200 points currently. That is an annual growth rate of more than 5% a year, without considering dividends.

If we estimate the returns for the past 26 years with reinvested dividends (assuming the index has a dividend yield of around 3%), we could easily have gotten annualised returns of 7% to 8%. This estimation is in fact, quite similar to the returns of the SPDR STI ETF (SGX: ES3). The exchange-traded fund tracks the STI and has delivered an annual compounded rate of return of 8.4% over the past 12 years.

Foolish Summary

If we narrow our view on investing to a short time frame, it’s easy to get caught out by the randomness and lose faith in the concept of investing itself. As such, it can be good to take a step back – you will then be able to see the true beauty of the market and appreciate the power of time.

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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 Stanley Lim doesn’t own shares in any companies mentioned.