Be In It For The Long Haul

Day to day, month to month, and even year to year fluctuations in the stock market may be steep. Zooming out to see the big picture of your true long term investing horizon should keep you from doing something stupid in a panic.

Investing usually involves long time spans of 10, 20, 30 years or more, in which case you need a long term perspective when viewing market swings, investment performance, and costs. But as humans, such big chunks of time are abstract and hard to think about. We're programmed to worry about the here and now. How much money do I have today? What are the markets doing today? How much is that costing me today?

But that train of thought is dangerous because we unknowingly sacrifice long term goals because of short term emotions. We are irrationally driven to react to drivers that we viewed through the magnified lens of the present. But if you take a step back and look at your investment horizon, the perspective is totally different.

The main power of investing is from compounding interest over time. Your money can grow money and that money then grows money, again and again. And before you know it, you have a ton of money for retirement (as long as you're not giving it away to the Wall Street hucksters).

Think of money as rabbits. You start off with two rabbits and they have kids. Then those kids have kids. Repeat. Well, if you give away two of your first generation rabbits, you not only lose those two rabbits today, but you lose many lines of future generations of baby rabbits as time goes on. Don't give your rabbits to Wall Street. Think about those poor unborn baby rabbits.

So a dollar here and there may not seem like much today. An extra dollar saved and invested here. An extra dollar not payed to a broker there. But these dollars today are seeds that grow into full foliaged money trees for retirement. It's all too easy to let the seeds slip through your hands today, but hold on tight and see them for what they really are - future trees.

A long term view also helps keep things in perspective. What may appear to be big market drops aren’t that big if you zoom out to view the full context. It's the mountain out of a mole hill, or in the investment sense, a valley out of a divot. Once again, we can look at the historical numbers for evidence and comfort.

Just look at the range of average annual returns over 1 year, 10 yr and 30 years. Over 1 year, there are huge swings, like a roller coaster. As your investment horizon lengthens, the range in the average annual returns gets much smoother. So as long your investing for 30 years, it doesn't really matter if you started during the depression, the raging late 60's, or the bust mid seventies - it all works out to be about the same average annual return over time.