We frequently hear people comparing investing to gambling. When in fact, they are the opposite. When you gamble, your greatest chances of coming out on top is in the near term. The longer you gamble, your chances of beating the house decrease further and further.
With investing, the chances of losing money in the short term is at its greatest. But unlike gambling, where the result is determined on an event happening or not, when you invest, you can just maintain your investment for more time.
As long as you have invested in quality assets, if you maintain your investment for long enough, it is more likely than not that you will have a positive outcome.
We can look at the returns for the S&P 500 back to 1926. These statistics go back so far that the include The Great Depression and World War II. Investors have averaged an annualised return of 10% per annum by investing in this index. But what if you were one of the unlucky ones who invested around the time of The Great Depression?
We should have a recap of what caused The Great Depression. A recession had started in the US but the Federal Reserve continued to raise interest rates. President Hoover also increased taxes to fund increased federal spending. The US also entered a period of protectionism which was countered by the introduction of tariffs by other countries. The result of this was a decline of US exports by 66%. If that wasn’t enough, the stock market was in a bubble with lots of people borrowing to invest. When the bubble burst, they defaulted on their loans.
With this perfect storm for investors, surely an investment in that period would have been wiped out? Not quite but not far off. If you had invested in July 1931, you would have seen your money fall by -67.57%. $1,000 would have fallen to $324.30. But as we can see below, the longer that you had your money invested for, the smaller the loss.
After 10 years, an investor’s $1,000 would be worth $602, still down 38%. After 15 years, their $1,000 would be valued at $940. After 20 years, it would be worth $1,454!
This is an extreme example but it is real and it did happen. For most investors, they would have cut their losses at some point, thinking that they will never get their money back. But as we have seen from this extreme example, if you hold onto your investment for long enough, you will have a positive outcome. Time is your friend.
29 August 2022