To make the case for long-term investing, you need little more than a multi-decade chart of the market. At that scale the benefits are undeniable: bottom left to top right, at a very tidy rate of growth, thank you very much!
What gets lost at that scale, however, is what you actually have to live through along the way. Major disruptions may look like mere wiggles in hindsight, but they are anything but in the moment.
The volatility isn’t the hardest part, though. Well, it is for the tourists who only show up at the end of a bull market. But those of us who’ve been around the block a few times have long made peace with the market’s inevitable gyrations. For the seasoned investor, the harder challenge is often exhaustion, or even boredom, which can be just as dangerous.
That is to say: if markets don’t shake you out, they’ll try to wait you out.
There are plenty of decade-long stretches where a prudent, stoic investor could have done everything right and still received no real reward.
Take the decade from the mid-1960s. An investor who bought the broad Australian market (the historical equivalent of holding an ASX 200 ETF) and held through the late-60s mining bust and the 1973 crash scraped together an average nominal return of roughly 2% to 3% a year, dividends included. Once you factor in the era’s double-digit inflation, that works out to a brutal real return of roughly -4% a year.
In other words, they held for a decade, endured two drawdowns of more than 50%, refused to panic-sell, reinvested every payout, and still walked away with their purchasing power gutted.
You’ll find a similar story in other decades and other markets. Even in recent memory, an investor who bought the ASX at its late-2007 peak was still staring at a capital loss ten years later. Even with dividends, their real return over that post-GFC decade was less than 1.5% a year. That’s worse than a term deposit, for a full decade’s worth of volatility.
So-called “lost decades” are not black-swan anomalies.
None of which is to suggest we’re entering such a period now, or anytime soon. Only that we could, and it wouldn’t be at all unusual. Whenever such a stretch does come around again, and we enter that long, dark winter, we’ll be tested in a way volatility never could.
Not at first, mind you. But each week of languishing gets harder than the last. Each excruciating month of false dawns and broken dreams piles onto the last until it becomes almost unbearable.
Boredom breeds the itch to tinker. Doubt creeps in and erodes your conviction. You watch others get rich elsewhere, envy kicks in, and the shiny distractions become harder and harder to ignore.
It’s a special kind of torture, far less visceral than the kind volatility provides, but more painful in aggregate. Much like Chinese water torture, it gets worse the longer you’re forced to endure it.
But as Winston Churchill put it, if you’re going through hell, keep going. Take solace in knowing that these periods, painful though they are, lay the foundation for the next run. And the sweetest runs tend to begin at the tail end of those suffocating, hopeless plateaus.
Winning as a long-term investor is as much about endurance as anything else. The market tests your stamina at least as much as your brilliance. As Nietzsche put it, “He who has a why to live can bear almost any how.”
So hold your why close, tune out the clock, and let time do the heavy lifting.
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