Investing in the stock market often feels like a game of precision where timing is everything. However, the reality is quite different. We believe the key to successful investing lies not in the perfect timing of investing decisions but in the duration and quality of the investment. This principle is guided by an often-overlooked aspect of investing: that the economy itself is not finite. Through the lens of time, it is ever evolving, innovating and growing, which is what you participate in as a long-term investor. Yet, many view investing as a zero-sum game played in short windows with a finite pool of return up for grabs to the savviest or fastest to act.
Historical Growth of the U.S. Economy
U.S. Real Gross Domestic Product (GDP) Seasonally Adjusted Annual Rate with Recessions Shaded
Notwithstanding 12 recessions (and counting) during the past 75 years, one could have gotten on the U.S. economic juggernaut at virtually any point and done well with a combination of diversification, quality and time. Time, in this instance, is more a measure of patience for periodic economic traffic jams to clear on your investing roadtrip. It is not in reference to being an expert, or even particularly average, at market timing itself. In fact, as the below chart illustrates, even if you had terrible timing and invested directly before some of the past century’s worst economic crises, you still would have done very well, averaging 7% returns from equities across the decades that ensued, despite the significant drawdown from poor timing on the original investment.
What if you invested at the start of crises?
Annualized Return of the S&P 500 Since the Start of Major Crises
Every bear market and economic malaise feels different and daunting. Questions of when this will end or how this will end are the very near-term unknowable questions that provide the basis for higher returns. My father used to say, “If it was easy, everybody would be doing it,” which is the precursor to, “If there was no uncertainty in the future, stock prices would reflect that,” and the equity risk (return) premium would go away. So, in some regards, we should be thankful that uncertainty still exists because with it comes the opportunity for higher returns. The good news, as we’ve seen from the above chart, is that it doesn’t take perfection from a timing perspective to earn attractive returns. It does, however, take discipline, patience and a plan to harness the utility value of the stock market for the life you want to live.
In conclusion, the essence of successful investing is patience, good judgment and time. Fortunately, you don’t need to time the market perfectly; often, you just need to give your investments time to grow. By focusing on the long term where others cannot or will not, you can navigate market volatility, earn more of the available equity risk premium and make progress towards achieving your financial goals.