5 Steps for Successful Long-Term InvestingSubmitted by Moneywatch Advisors on May 25th, 2021
Assuming imitation is indeed the sincerest form of flattery, consider this blog post a bit of puffery for J.P. Morgan’s recent thoughts on this subject that borrows heavily from the data in their 2020 Retirement Confidence Survey.
- Plan on living a long time
If we are fortunate enough to make it to age 65, odds are we’ll make it much farther than that. In fact, 90% of couples who have at least one that reaches age 65 will have at least one that lives to age 80. 49% of those couples will have at least one make it to 90. Living longer is great but also requires saving more. To increase your odds that your money doesn’t run out before you do, save more – the earlier the better.
2. Compounding, not cash, is king
To reemphasize the point from above about the importance of saving early, compounding was once reportedly declared the 8th wonder of the world by Albert Einstein. An investment of $10,000 in the S&P 500 in 1970 was worth $1.8 Million in December of last year - if all the returns and dividends were reinvested. If the dividends were not reinvested, the total would have been $408,000. Earning earnings on your earnings is magical so limit your withdrawals until retirement to help fuel your returns.
Dividing your proverbial eggs among several baskets not only helps smooth out the ride but helps you get where you’re going sooner too. Last year, an investment of $100,000 in the S&P 500 peaked on Feb. 19, dove to its low of $65,000 on March 23, and climbed back to even by August 10. A portfolio consisting of 60% stocks and 40% bonds, however, only declined to $80,000 and recovered all its original value by July 20.
4. Market volatility is normal
Of the last 41 years, 76% ended in positive returns. Over that time, however, the S&P 500 averaged a decline of 14.3% at some point during the year – even while achieving positive annual returns in 31 of the 41 years. Don’t let the roller coaster rattle you.
5. Staying invested matters
Let’s face it, losses hurt more than gains feel good. So, when our investments decrease in value, our emotions may tell us to “take control” by selling before things get worse. History shows us this is the worst thing we can do. If you had invested $10,000 in the S&P 500 on January 2, 2001 it would have totaled $42,231 by the end of 2020. That’s an average annual return of 7.47%! (That time period includes the Great Recession of 2008-09 and the recent pandemic, by the way) If you had panicked, sold, and missed just the best 10 days of the stock market during that 20-year period, your initial investment would only total $19,347 – an average annual return of just 3.35%. Miss the best 30 days in 20 years? Your initial investment would have lost $2600.
As the ads for Certified Financial Planners say, “Make a Plan.” Then, trust it.
Steve Byars, CRP®