Long-term Investment is Your Portfolio's Secret Weapon

Written by Jordan Waldrep, CFA, Bank OZK Chief Investment Officer

So, you and your investment manager have created a plan with your goals, timeframe and risk tolerances in mind. That’s great! You’ve taken a key step on the path to reaching your financial goals. However, it's only the first step. One of the most difficult things to do as an investor is to stick with an investment plan for the long term. That sounds easy, but when things happen in life, it becomes hard to stay the course.

Why Long Term?

Historically, a long-term approach has made success in investing easier to achieve. Investing of any kind involves a bit of soothsaying. Economists, portfolio managers and investors are trying to parse through mountains of data to understand what’s important and where the markets are headed. Strangely, it's harder to predict where the market will be in 2 days than in 5 years. Why? There's so much noise in the day-to-day with events or rumors that it can impact the market positively or negatively in the moment and just as quickly be forgotten.

To truly understand the power of long-term investing, let’s take a look at some data. The chart below shows the trading periods from December 31, 1949, through the end of 2023. During that time, there were over 18,000 trading days in the S&P 500, a literal lifetime of market activity.

If you picked a random period in the past 70 years, it’s more likely to be positive when your trading period is longer. Any given 1-day trading is positive 53% of the time, essentially a coin flip.  Any given 5-year period has an 84% chance of being positive. Historical performance gives us no insight into the future, nor does it ensure that a 5-year investment in the S&P 500 starting today will be positive. What this chart shows us is that investing for the long term removes the noise of the day-to-day.

Why Stay Invested?

It’s easy to look back on the market history and say, “If I had avoided that bad day or that bad month, I would have done so much better!” Indeed, when we have the benefit of hindsight, it’s often obvious. However, in the moment, such clarity is rarely available, and the causes of the market’s daily up-and-down movements are often obscure. Whatever you think will happen next, it’s best to stay invested and remain on course. Why? Because if you miss just a few good days in the market, you lose out on the lion’s share of the returns the market has generated historically.  The chart below shows the impact of just missing a few good days.

Here we see the returns of the market from December 31, 2013, through the end of 2023. The S&P 500 delivered a healthy 12% annual return during that period, and if you had invested $100,000, you would have realized a tidy profit. But if you sold out of the market for 10 of the best days, you would have cut your returns by more than half. If you sold out for 30 of the best days, you would have turned a positive bull market run into a negative return in your portfolio.

One of the most insightful quotes of Warren Buffett comes from his 1987 Berkshire Hathaway Annual Report, when he summarizes the great Benjamin Graham saying, “In the short run, the market is a voting machine, but in the long run, it is a weighing machine.” When investors create a plan for the long term and stick to it, they avoid noise and get to the true long-term value of their portfolio.

Want to elevate your investment plan? Visit https://www.ozk.com/trust-wealth/ to connect with one of our wealth advisors today!

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