Investing is a Long-Term Game

Did anyone panic when they saw the market downturn on Monday? I know I received quite a few panicked texts throughout the day.  A lot of people frantically checked their investment balances and let worry set in. I didn’t even check my balances. When it comes to long-term investing, small corrections and market dips really don’t matter.

Building wealth and financial security is at the forefront of many people’s lives. There are a number of strategies to build net worth over your lifetime, but what I’ve realized is that the most effective strategies take time.

The value of time may be the single most powerful tool in building a healthy investment balance and attaining financial independence.

How many of you have had a friend or colleague explain some new strategy to make money fast; like a multi-level marketing scheme or a new cutting edge stock that was guaranteed to have triple digit returns? I can’t count the number of times that I’ve carried on these conversations, and in each case, the money making endeavor never seems to come to fruition.

When I first started my path to financial independence and began investing in the market, I quickly realized that investing for short-term gains is a losing proposition. I was confident that I’d be an incredible stock picker. But what I found out is that pursuing wealth with a short-term mindset will have the unintended effect of ruining your rate of return and your ability to build net worth.  This is exactly why I invest in index funds for my retirement accounts.

I think Warren Buffet said it best when he stated, “if you aren’t willing to own a stock for ten years, don’t even think about owning it for ten minutes. Put together a portfolio of companies whose aggregate earnings march upward over the years, and so also will the portfolio’s market value.”

I eventually wizened up and began investing my portfolio in low cost index funds. Or at the very least, in blue chip large cap companies that I believed would provide value over the long-term. In doing so, I’ve seen substantial gains in our retirement portfolios (Roth IRAs & 401-K’s) as well as our taxable investment accounts.

There are so many people out there that are completely afraid of investing in the stock market. But how many millionaires do you know have amassed their net worth by investing in CD’s or savings accounts?

Despite the volatility and market swings that you will undoubtedly experience, the stock market is one of the only investment vehicles to build significant net worth during our lifetime. The key is avoiding a short-term mindset.

The market will go up and the market will go down. But over the long-term, the market has always generated positive returns. In fact, the S&P 500 has returned approximately 10% average annual returns since its inception!

A financial plan with a long time horizon will have a much better chance of achieving your financial goals. The power of compound returns is profound. If you started saving $100 a month at age 40 with a 7% annual return, you’d end up with $49,195 by the time you turn 60! If instead you decided to start saving $100 per month at age 25, you’d end up with $165,884 at age 60. That’s a 237% increase in your nest egg by saving over the long-term!

In the end, net worth is a long-term game. It’s not about realizing great returns month to month or year to year. It’s about prudently investing in a diversified portfolio over the course of 20, 30 or 40 years. No matter what your income level, everyone can accumulate a substantial net worth by leveraging the most powerful tool in all of finance… time.

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photo cred: Tax Credits

13 comments
MoneyTimeBlog
MoneyTimeBlog

Good post!  This was the first downturn my wife has gone through since I encouraged her to set up a Vanguard account.  I had warned her that downturns can be more stressful than people expect, but she was unperturbed throughout and when the market went back up she said that it was "good and bad" and that she "kinda wanted to purchase".  


I married the right woman =).

Financial Tour Guide
Financial Tour Guide moderator

@MoneyTimeBlog Wow! First time experiencing a downturn and she didn't react?!  You definitely picked a good one.  If she can remove emotion from her portfolio, she'll likely see some great returns in the future.

holly@clubthrifty.com
holly@clubthrifty.com

I'm pretty much ignoring the stock market drama! It doesn't pay to spend too much time stressing about it. My plan is to continue investing as usual.

sunburntsaver
sunburntsaver

As a long term investor myself, the only thought that ran through my mind was "should I buy more now... or wait..." Looks like I missed my chance :) I keep track of my investments, because while I do own mutual funds for the most part, I do own some random individual stocks (gifts). They're solid and not going anywhere (I hope), though, so dips like this don't really bother me!

Financial Tour Guide
Financial Tour Guide moderator

The same thing crossed my mind. I think if there was any more of a dip I would have picked up a few stocks on my "pick list".

DC @ Young Adult Money
DC @ Young Adult Money

This is a great word, especially for this week.  I know my jaw dropped as I watched UNH drop below $100 yesterday.  I couldn't believe it!  But it recovered a bit, and honestly I told myself "this is a long term investing strategy.  It doesn't matter what happens today, this month, or even this year.  I'm in for the long haul."

Financial Tour Guide
Financial Tour Guide moderator

@DC @ Young Adult Money Having a long-term investment strategy will payoff.  It's easy to get swept up in the "Wall Street hysteria" but many times these dips are more of an opportunity than they are a detriment to your portfolio.

DC @ Young Adult Money
DC @ Young Adult Money

@Financial Tour Guide @DC @ Young Adult Money I agree!  In all honesty if I had a few extra grand laying around I would have been very tempted to buy up some stock that morning.  But I had already bought in as much as I was comfortable with.  Then again...it may be bad to have that attitude as it encourages trying to "time" the market.

Laura Beth
Laura Beth

Great post.

I didn't know Warren said that but it doesn't surprise me. And it's certainly worth remembering, especially today as stocks are so easy to buy and sell. It's still hard at times to take a long term perspective, especially when you hear news reports about stock market dives worldwide. I guess it takes discipline.

I like your suggestion regarding index funds. I learned the hard way from the market crash in 99/2000 after the Nasdaq hit 5000, and then came tumbling down. Now it's strictly index funds for me.

Thanks,

Laura Beth

Financial Tour Guide
Financial Tour Guide moderator

@Laura Beth It definitely takes discipline.  It's easy to get swept up in the 'doom and gloom' in the media.  I try my best not to look at my portfolio except once a year when I re-balance my investments.  Otherwise, I may start tinkering with my allocations which always seems to be a losing proposition.