It should be common knowledge, but investing in stocks is not going to make you rich overnight.

Sure, you may hear about the occasional crypto cowboy striking it big or see a bunch of self-proclaimed smooth brains on Reddit blindly following some guy named “Roaring Kitty” on the Game Stop rollercoaster, but if they make the money, they are the exception, not the rule.

Real wealth often stems from building a business. My journey, focused on investing and financial problem-solving, has provided me unique insights into the markets and investor behavior.

But entrepreneurship isn't for everyone, and that's okay. Even if starting a business isn't your calling, you can still build a substantial portfolio, but only by adopting a long-term perspective.

Understanding a "Long-Term" View

Before diving into the data, it's crucial to grasp the difference between "average" and "geometric mean" returns in investing. In the world of finance, sequence matters. Let's illustrate this with a simple example:

Consider a two-year period with a 5% loss in the first year and a 5% gain in the second year. The “average” return is 0%, which, in theory, would mean you neither lost nor gained any money.

In the real world, however, if we start with $10,000 and lose 5% in year one, we have $9,500. If, in year two, we gain 5%, our ending balance is $9,975. It would take more than a 5% return to offset a 5% loss because the starting capital on which the gain is earned is lower after year one.

This is why you are always cautioned not to sell in a down market.

Why Long-Term Investing is Crucial

I analyzed annual S&P returns going back to 1926 to answer the following question: If I invested $10,000 on Jan 1 of any year going back to 1926, how much would I have ended with if I left the money invested for one, five, ten, and twenty-five years? Here’s what I found:

• The S&P had 26 down years between 1926 and 2023 implying a 27% probability of losing money in any given year.
• Over a five-year horizon, you would have only lost money in 12 different starting years
  

• Unsurprisingly, four of the twelve followed the Great Depression.
  
• In the past 25 years, there were five instances in which you would have lost money, three of which incorporate the fallout from the dot-com bubble, and two of which include the Great Recession of 2008
  

• Over a ten-year period, you would have only lost money if you started investing in 1929, 1930, 1999, or 2000.
  

• The worst average return over these time periods would have been -1.4% annualized over a ten-year stretch (investing starting in 1999)
  

• Going back to 1926, over any twenty-five-year horizon, you would have lost money exactly zero times.
  

• Your worst return would have come from investing in 1926, which over the next 25 years would see the Great Depression, the 1937 Recession, and the Second World War. And you still would have returned 5.9% per year.
  
• Your average return for any 25-year stretch would have been approximately 11% per year.
  

Key Takeaways

1. Start investing early. You want the longest possible time horizon over which your money can grow.

2. Investing has an opportunity cost. If your returns are greater building a business, consider reinvesting in the growth of your company before adding to your portfolio.

3. Retirement accounts create discipline. These are a great way to instill routine and keep you invested over longer periods.

We are here to assist you in getting started. When you’re ready, reach out to us be scheduling a quick call by click the "Schedule a Free Consultation" button at the top of the page.

• We can create develop a plan to help you keep you invested for the long term
  
• We can manage your portfolios
• We can help you optimize your business and integrate it into your overall financial plan
  

Until next time,

‍