The Surprising Key To Successful Long Term Investing
Here’s an investing riddle: two investors start investing with the same portfolio and the same time horizon of twenty years. One investor reads market news constantly and checks their accounts every week. The other investor falls asleep for twenty years, a la Rip Van Winkle. Who does better?
It would surprise a lot of people that the Rip Van Winkle investor would be more likely to do well over time.
Contrary to how the financial media might make it seem, consuming a constant stream of information about the financial markets does not actually benefit individual investors. The media may answer to the call of a 24/7 news cycle, but the way to create wealth in the long term is actually to detach from the information overload and not react to the market noise – it’s nothing but static.
There will always be market noise. The stock market is not suddenly volatile, it is volatile, so the market goes up and down. In the long term, this volatility smooths out, and the overall trend is upward. With a balanced, diversified portfolio, along with the discipline and patience to wait out short-term volatility, an investor can do very well in the long term.
On the other hand, constantly reviewing market data and monitoring your investments daily or weekly actually often leads investors to react irrationally to market noise, selling when the markets go down and buying back in as they go up. This is a surefire way to lock in losses. It is the opposite of strategic investing. Not only that, but by trying to time the market you are likely to miss out on gains. In a given year the vast majority of market returns occur during a very small minority of days. If you aren’t continuously invested, you are likely to miss out on the biggest upswings of that year. The effects of this in the long run are significant.
In sum: a wise long-term investor never tries to time the market. This is why Rip Van Winkle, who sleeps through all the daily news, actually makes more strategic decisions in the long run–by not reacting to the markets at all.
There are some things investors can control (asset allocation, spending and saving rates, diversification), but the activity of the global markets is not one of them. A well-diversified, strategically optimized portfolio allows your wealth to work for you. The time to revisit your investing strategy and adjust your asset allocation is when a major life change occurs, not every time the market fluctuates.