Three Quotes All Long-Term Investors Should Keep In Mind

Three Quotes All Long-Term Investors Should Keep In Mind
Jonathan Hobbs

over 1 year ago5 mins

  • If you’re planning on being a successful investor in the long run, understand the power of compounded investment returns, and how it can make your investments grow faster with time.

  • Don’t worry about trying to time the market by predicting what might happen with the economy and interest rates. Instead, stick to your long-term strategy. You’ll reap the rewards later in life.

  • Keep some cash in your bank account if you need it to pay short-term expenses. Invest the rest so it has a chance to grow in the long run.

If you’re planning on being a successful investor in the long run, understand the power of compounded investment returns, and how it can make your investments grow faster with time.

Don’t worry about trying to time the market by predicting what might happen with the economy and interest rates. Instead, stick to your long-term strategy. You’ll reap the rewards later in life.

Keep some cash in your bank account if you need it to pay short-term expenses. Invest the rest so it has a chance to grow in the long run.

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In uncertain times, it can be tough to keep your eye on the horizon and stay true to your long-term investment goals. For some people, a little mantra or some words of wisdom can help. If you’re not up for writing your own, borrow one of my favorites. Here are three of them…

“Compound interest is the eighth wonder of the world. He who understands it, earns it. He who doesn’t, pays it.” – Albert Einstein.

Steadily growing your investment returns, year after year, can give a massive boost to your personal balance sheet over time. If you start with $1,000 and grow that by 10% in a year, for example, you’ll have $1,100 – a $100 increase in the value of your investment. But if you then earn 10% the next year on that $1,100, your investment grows by $110. That extra $10 might not seem like much of a change when you’re getting started, but as time goes on, you’ll see your portfolio growth really adds up.

Value of a hypothetical $1,000 portfolio assuming a 10% growth per year.
Value of a hypothetical $1,000 portfolio assuming a 10% growth per year.
Value of a hypothetical $1,000 portfolio assuming a 10% growth per year.
Value of a hypothetical $1,000 portfolio assuming a 10% growth per year.

Mind you, you’re unlikely to earn the exact same percentage return every year on your investments – let alone a 10% one. But as long as you’re earning a positive yearly return on average, you’ll see your overall gains expand over time as your balance grows. So it makes sense to take a long-term view on investing and build a core investment portfolio that you think will go up over time. Then, add as much money as you can to it each month, for as long as you can. And if you’ve got debt, pay that off as fast as you can too, just to make Einstein happy.

“Far more money has been lost by investors preparing for corrections than has been lost in the corrections themselves.” – Peter Lynch.

Investing icon Peter Lynch’s Magellan Fund grew an average 29.2% a year between 1977 and 1990. Not too shabby. And although the US stock market trended up over that time, it had its fair share of brutal corrections too – including a 35% drop in 1987. But Lynch understood he couldn’t time the market by trying to predict what would happen to interest rates or the economy. He wrote in his book, Beat The Street, about only selling an investment if its “fundamentals deteriorate, not because the sky is falling”.

I found some interesting data to back up Lynch’s thoughts about market timing. If you’d invested $1,000 in the Nasdaq in 1971, that investment would have grown to $130,000 today (blue line). But if you took that same investment and missed the index’s 20 best-performing days (gray line), you’d have only $26,000 to your name. What’s even more interesting is that most of the Nasdaq’s best-performing days happened during major bear markets, not bull markets.

Value of $1,000 invested in the Nasdaq. Price data from Yahoo Finance.
Value of $1,000 invested in the Nasdaq. Price data from Yahoo Finance.

See, if you’re constantly worried about bear markets and major corrections, as many investors are right now, you’re more likely to try to “time” the market – by hopping in or out of it when you think something big might happen. And while you might time it well once in a while, you could miss out on some of the market’s best days by sitting on the sidelines.

And there’s an even greater risk here. If you sell off your investment believing that the sky is falling – and then the market starts to recover – you could end up having to buy back in at higher prices. And at that point, the market could come down again, and you’d be caught two steps behind. If you’ve got long-term conviction on your investments, you’re probably better off using big market drops to add to those investments, rather than to sell out of them.

“How many millionaires do you know who have become wealthy by investing in savings accounts? I rest my case.” – Robert G. Allen.

There’s nothing wrong with keeping money in your savings account to cover important upcoming expenses – in fact, it’s something you should do. But in the long run, as investment author Robert G. Allen might tell you, having too much cash on hand, rather than in your investment portfolio will most likely lead to “cash drag”.

Consider this: if you’d invested $1,000 in the S&P 500 (green line) in the year 2000, it’d be worth $4,432 today. But if you’d kept 20% of that money in your savings account over that time, and invested just $800 of it in the S&P, your $800 investment (gray line) would be worth $3,546 – or 20% less.

Value of $1,000 invested in the SPDR S&P 500 ETF, vs. $800 invested. Price data from Yahoo Finance.
Value of $1,000 invested in the SPDR S&P 500 ETF, vs. $800 invested. Price data from Yahoo Finance.

Of course, there’s another problem with holding too much cash in the long run: inflation, which recently has been running rampant. Even if the Fed gets back to its historical target of 2% inflation per year, that’s still a big knock on your purchasing power over the next 10, 20, or 30 years. So like it or not, you need to take investment risks to keep up with inflation, not just to outpace it in the long run.

Purchasing power of $1,000 with different inflation levels over time.
Purchasing power of $1,000 with different inflation levels over time.

So what do all these quotes have in common?

All these quotes are about building wealth over the long term. So if you’re hoping to retire in style one day and you’ve still got many years left of investing ahead of you, they’re good ones to keep in mind. The great thing about the investment game in the long run is that the recipe for success is kind of simple: pick a good mix of investments that you think will rise in value over time, and buy into those investments consistently – for example once a month. Then tune out the short-term market noise and you’ll probably do just fine.

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Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.

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