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  • kevin ridgway

Is Long Term Investing the Key to Financial Success? An evidence based approach.

People will often take enormous risks for a very unlikely outcome.

I'll often hear,

"My Investments aren't growing, I want to make money quickly!"

If you're looking to 'get rich quick', investing is not the way to achieve this. However, you would be pressed to find a more efficient alternative to build wealth over time. Although you have heard this saying many times, it's especially true here. Investing is a marathon, not a sprint.

This is a common conversation I have with younger clients that are looking to speed up the process of compounding interest/growth. There is nothing wrong with wanting to pick individual stocks, however, you should understand the amount of risk you are taking by doing so. Stock-picking is not a long-term winning strategy. Quite simply, what worked yesterday is not guaranteed to work tomorrow. It is extremely difficult to pick great companies, and have those companies perform over a long period of time. Building off that, it is even more difficult to pick a speculative asset solely on the idea that it will ‘make you rich’ quick. Much of the success you hear about from speculative investments (Penny stocks/Crypto) usually boils down to luck. If by chance you do get lucky, the downfall comes from trying to replicate those results, which many people come to realize is near impossible.

"I only hear about people losing money - the market is too risky"

To reiterate, no one can time the market perfectly despite what many people out there suggest. The buy and hold strategy will always prevail, especially over a long-time horizon, with a globally diversified portfolio (mutual fund or ETF). Is it boring, Sure. Does it work, Yes.

Here are the results over various time frames for positive returns going back to 1970 for the S&P 500 and MSCI World Excluding-U.S. Index:

Past performance is not indicative of future results.

What does the success of long-term, buy-and-hold strategy mean for financial markets? It means that financial markets are efficient and will always continue to innovate and grow and an investor that just ‘buys the market’, will benefit from this process over time (diversification).

Markets go up and down which is the nature of investing, or at least the reality of being a long-term investor. The reason people invest to begin with is to increase the value of their savings for a specific goal like retirement. When all is said and done, there comes a point when you will not work for an income which is why you will need to have your savings and investments increase in value to support your lifestyle later on in life. Sure there are government benefits that support your retirement income, but they generally don't support a retirement people dream of such as being able to travel, dine-out, or support family members.

"I like to keep the majority of my savings in a bank account because the value never goes down"

In many cases, holding cash is a risky long-term asset because most people can't afford to have their purchasing power eroded by inflation (cost of living going up). Therefore, people invest to ensure their savings have the chance to keep up with the cost of living. To have that chance, people take a calculated risk that they are comfortable with.

Let's take a look at the impact inflation has on your savings sitting in a bank account.

The value on paper may not go down, but the effect of inflation would effectively reduce the value of your savings by $10k over a 5 year period... This compounds quickly (not in your favor) over a longer time period as well..

There is no risk-free rate of return that can consistently grow your savings. That does not mean cash equivalents such as GIC's or high interest savings accounts can't compliment some ones overall portfolio; they can.

What type of risk are you comfortable with to make sure that your savings have the chance to earn a real rate of return. It is important to understand your own time horizon and risk tolerance, which are never universal, and are always unique to your own situation and financial goals.


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