Surviving The Short Term

Thinking and behaving for the long term is one of the most difficult challenges an investor is faced with. Although simply buying and holding has produced fabulous returns, this type of investing requires you to commit to several sizable drawdowns, likely to be over fifty percent in some cases, over the course of your investing career. For many, this is  too steep a price to pay.

Below are all rolling thirty year periods for the S&P 500 going back to 1926. You’ll notice that some of the returns have been astronomical. You’ll also notice that the gap between the best and worst returns are quite large. There is a huge element of luck surrounding when you were born.

thirty year

Here are the numbers.

30 year

While the minimum thirty-year return was an unbelievable 851%, nobody knows whether or not the best days for U.S. stocks are behind us. I for one remain optimistic that I will see Dow 100,000 in my lifetime, but that’s neither here nor there. For investors, it’s critical to understand the trade off between avoiding major drawdowns and accepting lower returns. This is what a lot of buy and hold zealots misunderstand. Having your entire portfolio in a buy and hold strategy just isn’t for everyone. There’s an old saying that “Not everything that can be counted counts” and in this case, while total returns count, they are just one side of the story.

Acknowledging that you are emotionally unwilling to handle deep drawdowns and accepting lower long term returns is a far better idea than fooling yourself into believing you can buy and hold, and selling into a 40% decline, which unfortunately is all too common. Investors and investment advisors are faced with a dual challenge; thinking and acting for the long-term while surviving the short term.

Thank you to @econompic for helping me with the chart.