Have you ever heard the phrase “What’s old is new again?” Well, if you haven’t, now you have. To be honest, titling this article in the spirit of what it is about would likely have you scroll right by it. Two whole sentences in and I still have you wondering what the actual topic is. Well, this new but old strategy is about having a long-term investment strategy. Now, before you scroll on by, please continue to read as I do believe there is value in reinforcing an investment strategy that is as old as investing itself.
Somewhere along the way, we lost some of our sanity around our money. The earning of it, the care for it, the investing of it, the expectations of it, the spending it, and more. Ultimately I blame environmental psychology. We live in a world, somewhat predicted by Bill Gates by the way, where information, and action based on that information fits in our pockets. It is well known our attention spans are shrinking because of it, but I would suggest our decision making is as well. We see bite size pieces of information and, within minutes, or even seconds, buy the product or invest in the idea. I am not saying this is all evil, but with certain areas of our life (health, finances, etc.) I believe more time and research or even expert in person advice is needed. I would also suggest that this leads us to make statements or tell stories that we believe to be true with minimal or no data to back these up. So let’s boil this down from an esoteric rant to the topic of the day which is regaining some sanity over our investment practices, at least the majority of them.
I would say one of the biggest reasons we have moved away from long-term focused investment strategies is our psychological biases. Probably the most influential is recency bias. This is where our decision making is tied to the most recent stories or information we have received. What are some specific examples? How about what I call the “Gamestop” effect. They even made a movie out of this called “Dumb Money”. Need I say more? We begin to think that these events will repeat themselves or become substitutes for a well thought out and executed investment strategy. Another? How about low interest rates and apparent performance in the stock market in recent years? We seem to think that low interest rates will continue to be low and stock market performance will be high forever. Which leads nicely into us digesting small tidbits of information because data would suggest the broad market is performing well this year (2023) when in fact it is really about 7-10 companies contributing all of the performance and the remaining roughly 490 companies of the S&P 500 are somewhere around breakeven. This is not the only year in the last five that this has been the case where “the market” appeared to be doing very well when in fact it was only a handful of companies driving the performance.
Am I suggesting that the events I am highlighting from the last five years or so have not been fruitful to those LUCKY enough to be on the right side of those trades? No, they certainly have. I am firmly making the statement that this is not the foundation upon which you want to build your investment strategy. At some point you will be on the losing side of that. Even Jordan Belfort (the famed “Wolf of Wall Street”) recently did an interview with Yahoo finance where he suggests that the average investor loses all the time because of the “latest hot stock tip” and suggests in the article a long term strategy to structure your investment allocation. Another recently published blog from Entrepreneur lists what rich people do differently. The number two item listed in that article suggests they focus on the long-term potential of their money. Want to avoid recency bias in assessing the anecdotal evidence I am providing? Okay, even Albert Einstein, who was not originally a scientist by trade and not a financier at all, gets what long term investing can do. He captured it so well in this quote:
Compound Interest is the eighth wonder of the world. He who understands it, earns it; he who doesn’t, pays it.
How about another example of the benefits of long-term investing relative to the points made above. It is a well-known fact that Warren Buffet, worth more than $80 billion (that’s Billion with a B) made most of that after he turned 50 years old. Depending on the source you read, the data will vary, but look it up.
Hopefully I have now convinced you that long-term investment strategies have withstood the test of time with small snippets of evidence. Let’s get to some actionable items that will also stand strong over time like Stonehenge in England:
- Start investing early: We can run math for eternity on why this is so important. I have published and spoken many times, with specific mathematical examples, that someone who starts saving early, even if saving a lesser amount, can have as much or more at some point in the future as someone who starts saving later and may save more. This is the power of compound interest.
- Set a long-term strategy as the foundation of your saving and investing: Come up with some allocation plan of stocks and bonds that is a comfortable amount of risk and assess over time. The general guideline is to be more aggressive when we are younger, and more conservative when we are older. I am a bit contrarian in this. Be more aggressive when you are younger when it is money you will not need for the next 5, 10, or longer years. As you approach needing to rely on the money for something (education, retirement, buying a house, etc.) then it should get more conservative. Age may not be the most important factor, I believe timeline is.
- Retirement does not mean to pull your money out of the stock market: We seemingly have been programmed that when we reach our chosen retirement age, we need to get far more conservative which means less in the stock market. I would suggest this is not absolutely true. When we retire, we could have 20-30-40 years or more of life ahead of us. That is a really long time. Structure your portfolio to the needs you have.
- Diversification still works: Diversification can and should mean a lot of things. Stock versus bond allocation, diversification amongst various industries (not just investing in the hot sector like Technology), tax diversification, and more.
- Stick to the plan: This does not mean you should not revisit the plan, it means do not jump ship at the next hot tip you hear or the market moves against you. When a particular market or sector is down, and you maintain your investing strategy, you are buying more shares cheaper.
I know, it’s boring and not flashy and doesn’t always generate great stories with friends. But it has proven to work and if you listen to the RIGHT people, they still adhere to a long term approach. Does this mean you cannot “dabble”? No, if you are well established in the many areas of your financial life, take a tiny piece and play. I will warn you though, that first time you lose, you may start to think about doing that again. It is no different than going to a casino. I have had many discussions with people that vehemently oppose going to a casino and gambling their money. Then in the next breath talk to me about their “investing” strategy and you can imagine what I want to blurt out.
Get your foundation set and deeply rooted in a well thought through investment strategy that includes allocation to different asset classes, how much you will contribute, and how often you will contribute. Stick with this for a long time and you will be surprised at the overall results. It has built wealth in the past and will build wealth well into the future.