What I believe: the Long Term is longer than any of us expect. I think I will live to 100, but even that may be too short. And if it’s too long, it won’t matter to me anyway.
…Most investors believe three or even five years is a long time, and 10 years is an eternity.
Larry Swedroe, Your Complete Guide to Factor Based Investing
The returns
How long does it take for the US market to make you money?1 (in excess of the risk free rate of 1-month treasury bills)
Over a one year period, 66%.
Over three years, 76%.
Over ten years? 90%
Over 20 years? 96%
Over 20 years, in 4 out of 100 times, the US stock market would have returned less than the risk-free rate.
That is risk. If returns were guaranteed, there would be no risk and no return.
But the longer you wait, the higher the chance of reaping those returns.
The volatility of equities
Take a look at the range of outcomes for the S&P 500.
At the 1 year range, it’s +52/-48%
But at 30 years, it’s +13.6/+8%
The range of outcomes narrows as the time horizon gets longer.
The volatility of outcomes
Returns aren’t guaranteed. Over the long term, we have to plan for a range of possible outcomes.
When planning for the long term, your plan has to incorporate the best and worst possible outcomes.
I don’t need to change my plan because Trump got elected, or because tariffs are flying left and right.
Any good plan should have accounted for the uncertainty in our world.
The stock and bond markets have survived
Avoiding Misbehaviour
Don’t chase outperformance.
There’s a reason why all the legal disclaimers say “past performance is not indicative of future returns”.
If your time horizon is 30 years, 40 years, or 60 years, then 1 year is a drop in the bucket.
Nvidia has a 5Y return of 14x. If someone tells you to buy Nvidia today, their advice was late by 5 years.
This is recency bias.
The best way to find the next Nvidia is to buy the entire stock market. The next one is in there somewhere.
And stay the course.
Don’t just do something, stand there!
Jack Bogle, founder of Vanguard
- Swedroe, L. E., & Berkin, A. L. (2016). Chapter 1: Market Beta. In Your Complete Guide to Factor Based Investing, BAM Alliance Press.
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