What does the term “long-term investing” really mean? How long is long-term?
One of my favorite clients, Jim, just turned 95-years old. He is sharp as a tack. He is a patient, humble, and gracious man. He is definitely a “long-term” investor.
When he was born in 1924, the Dow Jones Industrial Average (Dow) stock index was 96 and included companies such as American Locomotive and the Studebaker Corporation. In New York, Clarence Birdseye perfected the freezing process and opened a frozen seafood company. Meanwhile, Massachusetts Investors Trust became the world’s first mutual fund with $50,000 of capital (today, there is approximately $24 trillion invested in mutual funds).
Jim married in 1956 as the Dow reached 488. His children were born in the 1960s along with the invention of the halogen lamp, soft contact lens, and the first handheld calculator.
He remembers the frustration of “long-term” investing during the period from 1966 to 1982. The Dow moved sideways, fluctuating from 600 to 1,000. Meanwhile, inflation raged out of control. By 1982, inflation reached 11%. Of course, one of the main goals of long-term investing is to beat inflation and to increase your standard of living.
Jim retired in 1984. The Dow was 1259. In the years that followed, innovation continued as the modern internet came into being, Apple released its first personal computer, and, Microsoft released a demo of Word for MS-DOS. Dodge introduced the mini-van. The index added American Express, McDonalds, and Coca Cola.
I met Jim and his late wife in 1988. The Dow was 2168 as the World Wide Web emerged. Shortly after that, the Savings and Loans Crisis caused the 1990 recession, and more than 1,000 banks failed. Still, the Dow proceeded to grow from 2810 (January 1990) to 11,497 (December 1999).
Moving into the new millennium, the years that followed were extraordinary, both good and bad. There was a market crash, followed by a recovery, followed by a crash, followed by a recovery. And, here we are today, with the Dow near 26,000.
What are the lessons of long-term investing? The stock market is on a steady march upward, powered by innovation. There will be stagnant decades of performance. An investor’s best protection against market losses is time and patience.
“Don’t panic when the bottom falls out of the market,” Jim told me. Markets recover from downturns; sometimes individual companies do not (he migrated from investing in individual companies to investing in diversified mutual funds).
It is impossible to predict what will happen next, but many market prognosticators are forecasting lower investment returns over the next decade. Remember that the amount you save has as high, or higher, impact on your portfolio balance as market returns. So, don’t overreact when things don’t go as planned; live within your means; be a steady saver, and, be thankful for life’s many blessings.
Happy birthday Jim!