Humans can be very myopic creatures, especially when it comes to investing. More often than not, we hear ourselves or people around us moaning about the dismal returns of our portfolios just months or even weeks after we start investing. We lament on the less than ideal returns our portfolios are generating and then decide that it's time to tweak the portfolio again, only to then find the new portfolio generating returns which are below our expectations and the cycle kind of repeats over and over again. Hands up if you ever feel this way.
There is a good chance that you are not alone. I'm pretty sure many of us feel this way too. But rest assured this is all normal, and let me explain why.
In the early stage of your investing journey, the probability of you even getting a positive return is no better than a coin toss. This means that the probability of the stock that you buy today rising tomorrow is about the same as the probability of it dropping tomorrow. In this article, a simulation is run based on stock market data between January 1971 and May 2020. If you were to pick any random day to invest during this period, you will have a probability of 52.3% of making gains by the next trading day. This is no better than a coin toss.
When you start to extend your holding period to be a bit longer, you start to see the magic. If you were to extend the period to a quarter, chances of you making gains will be 65.09%. If you were to extend it to a year, the chances increase to 71.83%. By the time you extend it to 13.5 years, you will never lose money.
And the occurrence of this could probably be due to two reasons.
Firstly, the market always recovers. You may be very bad at timing your entry into the market but you can't be unlucky for a very long period of time. Over time, the element of luck drops drastically and you will be sure that you will be making gains as the time period increases. However, remember that the market always recovers, but some stocks never.
Secondly, the compounding effects is a great wonder which you can't neglect. Given a long period of time, the compounding effects will provide a very strong tailwind to the growth of your portfolio and this is also why investing early is very important for such compounding effects to take place. If you were to only invest in your 50s, the runway for your investment to recover and subsequently multiply is much less than someone who invests in his/her 20s.
So if your portfolio is down today, you should be aware that unless you are picking really bad companies, it's almost always pay to have a longer term horizon for your portfolio and not be in a rush to tweak something whenever things don't go your way.
Always remember the early stage of your investing journey is no better than a coin toss.
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