Sometimes You Need An Example of How Long Term Investing Works
It is useful to look at an example of how long term investing works to gain an understanding regarding why the “buy and hold” investing strategy is so highly regarded in the investment community and may be the correct investing strategy for many individual investors to pursue. While some may view the “buy and hold” investing strategy as so common and basic that it is little more than a useless cliché that is repeated by investment advisors over and over again, a look at the stock market data over long periods of time demonstrates why this strategy is a prudent one to utilize. In fact, most investors would be surprised to learn just how much the stock market has increased in value if they look back four decades, which is a reasonable amount of time for a person to be invested in the stock market for long term needs, such as retirement.
An Example of How Long Term Investing Works | Looking at Stock Market Indexes
Consider this example of how long term investing works, which looks back at stock market indexes forty years into the past. In April 1975 the Dow Jones Industrial Average (DJIA) was approximately 825, while today in April 2015 it is over 18,000, which is a more than 2,000% gain. The Standard and Poors 500 (S&P 500) index had even larger gains over this forty year time period of over 2,300%. The winner over the past four decades has been the technology heavy NASDAQ index, which has booked over 6,200% gains since April 1975.
The examples above are just gross index gains over four decades, and do not take into consideration dividends that were paid or reinvestments of dividends into stocks over this period of time. When dividends and reinvestments are factored in, these gains could be substantially higher for individual investors.
Forty years is a reasonable amount of time to take under consideration when accessing long term stock market gains. This is because most people start saving for retirement when they are in the twenties or early thirties and invest money over four decades for retirement, which occurs anywhere from the age 65 to 75, depending upon a person’s circumstances.
What To Keep In Mind Regarding Long Term Investing
Here are some important things to keep in mind when investing for the long term, such as investing for retirement several decades in the future.
- Dollar cost averaging works. This is when you buy stock or stock funds, such as mutual funds or exchange traded funds (ETFs), on a regular basis, regardless of where the stock market is trading. Dollar cost averaging will allow you to establish investments in stocks and stock funds that will grow over time, without regard to timing investment entry points. Just put your money to work in the stock market.
- It is important to remain invested. There is an allure to trying to time the stock market; however, it is important to not get caught up with market timing and to just remain invested over the long haul. The reality is that even professional investors have difficulty timing the stock market properly. Ordinary individual investors are better off riding out any stock market dips and using the principal of dollar cost averaging to buy on dips, with a focus on long term gains. Even if an individual investor successfully gets out at a near term stock market top, all too often they fail to buy back in at a near term bottom, and find themselves out of the stock market missing the next leg up.
- Reinvest dividends to maximize returns. Investments in a broad array of stocks can be expected to return approximately nine percent per year over long periods of time, such as four decades. This includes both up years and down years. In the long run, the up years will outnumber the down years, providing the long term returns. The best way to maximize stock market investment returns over long periods of time is to reinvest any dividends earned back into the stock market, as reinvested dividends invested in stocks will enhance returns over time.
An Example of How Long Term Investing Works | Focus On The Long Term
The most fundamental thing an individual investor can learn about investing is to tune out the constant drone of stock market pundits and simply focus on the long term. The thousands of percent returns that have occurred in the stock market from April 1975 to April 2015 included many periods of stock market panics and gloomy outlooks, including the October 1987 crash, the severe 2000 to 2002 bear market sell-off, and the financial crisis and stock market swoon of 2008 and 2009. Those who sold out during these notorious stock market sell-offs lost out on the long term investment gains.
If you do not need your money in the short term, because it is intended for retirement decades in the future, then just ignore the short term stock market noise and keep your focus on the long term. If you have extra money sitting in cash on the sidelines, use any dips in stock market averages to dollar cost average and increase your long term investments. The example above regarding how long term investing works should provide an individual investor needed confidence to be a long term investor.