April 13, 2023
I am well aware that investing has been quite a challenge lately. We went through a painful bear market for most of 2022. And after an encouraging 7% rally this past January, the S&P 500 gave back more than half of that gain in February and March.
It is totally understandable to be concerned or frustrated. But please don’t act on those emotions. Even if the current economic headwinds do indeed cause more market volatility and lead to a recession, investing in stocks for your long-term goals remains a smart investment strategy.
Fidelity recently crunched the numbers on how patience can pay off. It tracked a hypothetical $10,000 investment in the S&P 500 stock index made on Jan 1, 1980 through the end of 2022.
If the money was left untouched, the $10,000 invested in 1980 was worth $1.26 million at the end of 2022.
But if an investor had gotten nervous at any point and had moved out of stocks from time to time, and managed to miss just the 5 best days for the S&P 500 during that 42-year investing stretch, the $10,000 would have grown to just $782,000.
You read that right: the difference between the $1.26 million and the $782,000 was simply from missing out on the five best days to be invested in the S&P 500.
If the 10 best days were missed, the $10,000 would have grown to just $563,000. And if the 30 best days—the equivalent of one month of trading days across 264 months—the $10,000 would have grown to $204,000.
Clearly, patience paid off. This example is also a helpful reminder that recessions and bear markets don’t undermine success. Between 1980 and the end of 2022 there were six bear markets (when stocks fall at least 20%) and six recessions. Yet over that entire stretch, $10,000 still managed to grow to more than $1.2 million.
So while I totally understand being jittery about the markets, I sure hope those of you investing for long-term goals will find the strength to practice investing patience. Especially given our current new reality where inflation is a concern.
The rate of inflation continues to come down from its sharp acceleration throughout 2022, but it is not likely to sink all the way to the 2% target that the Federal Reserve considers the sweet spot for economic health. The bottom line is that inflation always was, and always will be a long-term threat to financial security. And over the long term, stocks have proven to be the best way to earn inflation-beating gains.
That’s not to suggest you should only own stocks. Are you nuts? Do you think I am nuts? The point is that having a portion of your investments invested in stocks has always been a smart way to plan for the potential for living costs to keep rising over the years.
Saving, Family & Estate Planning
Credit & Debt, Saving, Investing, Retirement