Why when you invest, your glass is always half full!

Not invested right now? Unlucky you!

Recently, stock markets tanked and wiped off tons of value worldwide over the past few months. By mid-June this year, about 9 trillion USD had vanished into thin air globally within the space of just a few months. This is pretty bad, even looking at history which has seen some brutal sell-offs, like during the Financial Crisis in 2008. 

Did you also think “Thank god I am not invested right now”? Well, you might not be as lucky as you think.

Sure, no one likes to lose. In fact, us humans, we dislike loss, and will go to great lengths to avoid it. The reason for the losses we have seen this year is that investors got spooked by the potential of slowing growth teaming up with inflation in the aftermath of the corona crisis. This basically would mean the world making less money while prices rise which would end up eroding the wellbeing of our societies. Not much fun. 

But the truth is that long-term investing is financially rewarding – if you stick with it through the ups and downs that inevitably go with it. 

Here is why.

Stock markets make you money in the long run

On average, the S&P500 (a.k.a. U.S. Stock Market) gained 11.82% per year in the period of 1928-2021. This means that investing 100USD in 1928 by 2021 you would have $761'710 USD in your pocket. (Not a bad pay day!)

So why does the stock market just keep going up over the long run? Simply because the stock market mirrors the growth and wellbeing of the economy over time. Only by choosing to become a long-term investor can you participate in this growth. By providing money to these top corporations, you are giving them the resources to innovate, re-invest, and accelerate the company. Thus, making the company (and your shares!) worth more in the long run. 

The saying “no pain, no gain” has never rang truer than when we’re speaking about the stock market. 

The stock markets are extremely likely to go up in the long run. But, Nadine?! Why do you say likely? Well, if we are being technical there are some hypothetical circumstances that would deter this from happening. For example, if we go into a major world war. However, if that happens we have a much bigger problem than our retirement funds. Plus, the likelihood of this happening, over a long period of time (we’re talking 20-30 years of war here), and in a way that is all-consuming, is extreeeeeeeeeeemely small. It is almost non-existent. Even so, no one can predict the future. If I could, I would be very rich….

Back to stock markets. 

Let’s assume that they will go up, but they won’t get there on a straight line. In fact, they tend to take some detours along the way (think: rollercoaster) reacting to changing economic conditions. As long term investors, we like to call this “noise”. In finance, this concept is known as volatility, characterizing how much stock market returns fluctuate over time. 

These are the moments when it is difficult to keep your cool and remember the long-term benefit. In fact, many investors tend to leave the market when big negative movements occur in an effort to avoid more losses. And when they go back in  they tend to do so once most losses have already been recouped and significant gains have started to show. This common behavior ends up diminishing your returns over time as you lock in a loss and then miss large parts of the uptrend. Effectively this means that when the market starts creating noise you ignore it and you do nothing. You follow the strategy that you had. Remember this and you’re already an outstanding investor.

In investing and once invested, doing nothing, makes you great. - Nadine Hunkeler, Finance Phoenix Founder