My friend asked me, is long term investing really good?
And I thought it was an idiot proof answer... Wasn't the answer just a simple... Yes?
So... curious me, went to look back at some data...
So I went to look at a couple of stocks and indexes.
I'll give some estimated rounded numbers so that it's easier to read...
Just over the past 25 years.
I typically benchmark returns to double every 10 years. So for a 20 year investment, returns should be 4x.
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NASDAQ... The NASDAQ is currently around 10,000 points.
If you bought the NASDAQ in 1995, it was around 1,000 points. You return now would be 10x after 25 years. So it's easy to say. "WOW long term investment works."
However...
If you bought the NASDAQ in 2000, at the height of the dotcom era, it was around 5,000 points. You return now would be 2x. Which is considered low after a 20 year time frame. BUT the NASDAQ didn't recover to 5,000 points until year 2015. Between 2000 and 2015, 15 years with nothing to show for it.
If you bought the NASDAQ in 2002, after the dotcom burst, it was around 1,300 points. You return now would be 7.7x.
Which is not too bad for 18 years.
If you bought the NASDAQ in 2008, the peak period before the Great Financial Crisis, it was around 2,400 points. You return now would be 4x. Also quite good return for 12 years.
Note, at 2,400 points in year 2008, the index is STILL BELOW the dotcom era.
If you bought the NASDAQ in 2009, after the GFC, it was around 1,500 points. You return now would be 6.6x.
Even if you bought in 2002 after the dotcom, you are only up around 20% at this point after 7 years.
If you bought the NASDAQ in 2015, it was around 5,000 points. You return now would be 2x. That's quite good cos it's only been 5 years.
So what do I notice? Well... hindsight is always perfect.
Currently, the NASDAQ is at the all time high around 10k points.
It's easy to say, just invest long term and all will be good.
That's only if you are immortal.
At every period of time, there is someone who is just starting investing, there's someone retiring, or trying to grow their assets. Everyone is at different phases of their investing life.
If we look back and are in year 2001, just after the dotcom bubble, do you think people would be convinced that long term investing is good? The NASDAQ stayed depressed for many years after the dotcom bubble burst.
It's easy to be living at the peak of the index and looking back to say that long term investing has worked for them.
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If we look at the S&P 500, the situation is slightly different but similar.
S&P 500... The S&P 500 is currently around 3,300 points.
If you bought the S&P 500 in 1995, it was around 500 points. You return now would be 6.6x. Which is quite fair for a 25 year period.
However...
If you bought the S&P 500 in 2000, at the height of the dotcom era, it was around 1,400 points. You return now would be 2.3x. Which is considered low after a 20 year time frame. The S&P 500 didn't recover to 1,400 points until year 2007. Which was the next peak, cos after 2007 was the GFC.
So dotcom peak to GFC peak, there was barely any return.
If you bought the S&P 500 in 2002, after the dotcom burst, it was around 800 points. You return now would be 4.1x.
Which is not too bad for 18 years.
If you bought the S&P 500 in 2008, the peak period before the Great Financial Crisis, it was around 1,500 points. You return now would be 2.2x. Barely double after 12 years.
Note, at 1,500 points in year 2008, the index is around the same level as the dotcom era.
If you bought the S&P 500 in 2009, after the GFC, it was around 800 points. You return now would be 4.1x.
Even if you bought in 2002 after the dotcom, you are having no returns.
I'm not using the lowest point after the GFC cos nobody picks the bottom and picks the top. So maybe someone bought it at 600 points or 700 points or 800 points. Thing is, between 2002 and 2009, there's just a 20% return or less.
If you bought the S&P 500 in 2013, 5 years after the GFC, it was around 1,500 points. The S&P just recovered to the high before the GFC. You return now would be 4.1x. That's quite good cos it's only been 7 years.
So once again, what do I notice.
Well... hindsight is always perfect.
Currently, the S&P is at 3,300 points near it's all time high.
Again, it's easy to say, just invest long term and all will be good.
See, just in a few months, the market has recovered most of it's losses.
It's easy to be living at the peak of the index and looking back to say that long term investing has worked for them.
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If you look at the Nikkei, it's even worse.
The Nikkei peaked in 1989 at around 38,000 points.
It's now 22,000 points. 30 years and it's still under.
Of course, the Nikkei has gone through ups and downs between 1989 and 2020.
Thing is... long term investment doesn't always work out.
Now, I'm not saying that long term investing is bad.
It is probably still a very good idea.
What I want to say, is...
Everything depends on perspective.
When did you buy? What did you buy? Are you retiring soon? Do you need the money on sudden notice?
Markets go up and down. It's not always at the peak. it may stay depressed for many years.
Yes. Most likely the next peak will be higher than the previous peak. Even if it's not, the next next peak will be higher. But maybe someone cannot wait til the next next peak. Maybe they will be retiring soon.
Humans are not companies.
Humans have a life cycle. They have goals and milestones that they hit in life.
Whereas for a company, they have decades, or centuries. They can invest for 50 years, 100 years, 200 years. Yes, markets will likely be higher in 200 years time. But humans don't have the luxury of time. We have things to do. Lives to lead.
So the realization is that... the investment strategy very very important.
Buying at the high or near high is an extremely bad idea.
If you buy early and you buy cheap. Then it's great. Long term investment is always good.
But if you buy during the peak, or near the peak. It might take very long to make back the investment.
Even if you do not try to time the market and invest regularly, you will have similar effects. The gains or losses will not be so high, cos you will average the purchase price.
You will not do as badly as someone who bought at the peak.
You will not do as well as someone who bought at the bottom.
It will just be average. You won't face as much of the up, you also won't face as much of the down.
But... Eventually, you will face a period of downturn and returns could just be maybe 50% over a 10 year period.
People like to look at returns when prices are at the peak.
And yet, I doubt that's realistic. Markets go up and down through someone's investment life time.
The question is, how much is this person above water and how long do they stay above water?
Do they ever go underwater? And how long do they stay underwater?
During the past 20 years... yes long term passive investing has worked.
And if we look at the past 60 years, yes, long term investing has worked.
But, the real question should be, WILL IT WORK FOR YOU?
Will it work for you WHEN you retire?
Are you sure it will continue to work? Cos, WHEN you want or need the money is one of the most important things in such a plan.
Imagine getting into retirement age after the dotcom burst. Your investments would be crushed.
It would remain low for at least another 5 years.
Not all market downturns recover as fast as this recent one.
This person would likely have continued to work until the market recovers.
So the thing is, blindly following long term passive investing is... questionable.
It's still probably a good idea.
But it really needs more thought. Like when you need the money, how long the investment horizon is, is the Government doing a good job, is the country continuing to develop and grow, etc...
So for me, I think... I have second thoughts about long term passive investments.
Rather, I would now think about, HOW can I make long term passive investing work for me.
Cos I don't think it's as simple as just buy and hold anymore.
The long term buy and hold is a good idea, but I think there needs to be an exit strategy as well. Cos when I'm older, I may need to switch to less volatile investments cos I may need the cash in my old age.
Regardless, there needs to be some form of market timing involved.
I'd want to cash out at a near peak especially when I'm older and can't afford to wait for a recovery after a crash.
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