This Can Be Your Greatest Edge in Investing

Over the past week, I had been on a holiday with a loved one in Tasmania, Australia. While there, I had spent a substantial amount of time hiking in the pristine natural wilderness that Tasmania has to offer.

While along my hikes, which could take hours, I marveled at the solitude I found – more often than not, the only other person on the hiking tracks with me was my travelling partner.

In one of those moments of peace and quiet, I was reminded of one of the greatest edges in investing that individual investors have – the ability to remain blissfully unaware of the short-term rumblings of the financial markets and to just allow the magic of time to do its work.

Time – or more specifically, the act of being invested for years and decades – is an often ignored edge that individual investors have which professionals don’t. The problems that plague the pros is aptly described by Henry Blodget:

“If you talk to a lot of investment managers, the practical reality is they’re thinking about the next week, possibly the next month or quarter. There isn’t a time horizon; it’s how are you doing now, relative to your competitors. You really only have ninety days to be right, and if you’re wrong within ninety days, your clients begin to fire you.”

Career risk is not an issue which should bother individual investors at all but it’s something which often drives many professional investors to invest with a short time horizon – to their detriment. Why exactly is having time on our side such an edge? Consider these telling facts:

  1. Between 1871 and 2012 (that’s more than 130 years of history), an investor in the S&P 500 (a broad U.S. market index) with a 20 year holding period has never made losses even after factoring in the effects of inflation.
  2. Over the same timeframe, a one year holding period sees U.S. stocks lose their value 32% of the time.
  3. If we’re measuring returns at the start of every month from 1988 to August 2013, the Straits Times Index (SGX: ^STI), Singapore’s market barometer, has also not had any 20 year-period where it has clocked a loss (results are unadjusted for both dividends and inflation; it’s likely that these two forces may cancel each other out over the long-term).
  4. Meanwhile, holding the Straits Times Index for only a year would have given you a 41% chance of sitting on losses over that 25-plus-year block of time.

Said succinctly, the longer you stay invested for, the higher your chance of success. Of course, this does not mean that investors should be plonking their money indiscriminately into any stock they find – the quality of a company matters significantly too. (If you’ve a firm whose profits – and by extension economic value – is set on a steady downward path over time, patience won’t help bring you gains).

A Fool’s take

Investor Nick Murray once said that “Timing the market is a fool’s game, whereas time in the market will be your greatest natural advantage.” With statistics such as the ones we’ve seen earlier, it’s tough to argue against the wisdom of his words.

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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 writer Chong Ser Jing doesn't own shares in any companies mentioned.