As traders, we're often driven by the excitement of quick wins.
But when it comes to longer-term investing, that same drive leads us down a dangerous path.
It’s tempting to treat your long-term investments like short-term trades, especially when you hear about strategies that claim to deliver far better returns than boring ETFs.
The Pitfalls of Treating Long-Term Investments Like Short-Term Trades
Treating your retirement money like a short-term trading account often backfires. Instead of allowing your investments to grow, you might find yourself selling too soon, focused on short-term price fluctuations. During pullbacks, you may think, “As soon as this gets back to even, I’m selling!”
The "Back to Even" Mentality
Getting back to even is something every investor faces. Markets don’t go up in a straight line. Take 2022 as an example:
From January, it took nearly 18 months for the market to get back to even. That's a year and a half where you might feel like you're not making any money—just trying to recover from losses.
The emotions of seeing negative numbers day after day can be really tough. Have you ever tried averaging negative numbers? It’s ugly, and it doesn’t get any better when you let fear dictate your investment strategy.
The Dangers of Rash Decisions
When you impose a shorter timeframe on your long-term accounts, you’re more likely to make rash decisions—like selling out of fear—when patience would have served you better. Let’s take a step back and think about what investing is truly about. It’s not just about the trades you make but the time you spend in the market. Far too many people try to time the market.
Why Timing the Market Doesn't Work
Phrases like
“I’ll wait for a dip before I invest,”
“I need to change my strategies,” or
“I’m going to sell everything and go to cash”
are common, but most of the time are the worst thing an investor can do
Too many investors miss the critical point that investing is not trading. They end up day trading or swing trading their long-term accounts, too focused on the daily ups and downs, losing sight of the bigger picture.
This has a devastating impact on compounding and growing those accounts.
The Impact of Missing Key Market Days
In investing, the market’s ups and downs are normal. What’s not normal—or at least not productive—is constantly trying to time these movements, especially in long-term accounts. Imagine missing the best 10 days of the market’s recovery after a downturn (look at the graphic above). Those few days could drastically impact your returns over the years.
The Numbers Don’t Lie
Data from 1995 through September 2022 shows that if you stayed fully invested in the S&P 500, your annual return would be 7.7%. Miss just the 10 best days, and that return drops to 4.7%. Miss the 30 best days, and you’re down to 1.1%. That’s nearly a 90% reduction in returns simply by trying to avoid the market’s temporary lows.
The Power of Patience and Staying Invested
I’ve seen it happen time and again—traders who are too granular lose out on the bigger opportunities because they’re focused on avoiding short-term losses. They’re so busy trying to get back to even that they miss out on the market’s recovery. But time in the market is what truly builds wealth.
The Solution: Separate Your Trading and Long-Term Accounts
So, what’s the solution? The key is to remain patient and stay invested in your longer-term accounts. Have a separate account for trading. I believe you can use math and technical analysis to generate cash flow in a trading account. However, I also know that this is not a great long-term investing strategy for 99% of traders.
Embrace Time in the Market
Understand that getting back to even is a natural part of the investment process and that time in the market is generally more important than timing the market. The market will have its downturns, but history shows that it always recovers. And when it does, those who stayed invested reap the rewards.
So next time you’re tempted to sell your long-term investments because the market is down, remember this: the market’s job is to recover, but it can only do that if you stay invested. Time in the market is your greatest ally. Embrace it, and let the market work for you.
Join the Inner Circle
If you want more insight from someone who’s been an investor for almost 30 years and a trader for over 20, sign up for Mr. Money Maxwell’s Inner Circle. For the next two weeks, the price is reduced during the soft launch. But hurry—prices go up in September!
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Happy trading, good kids!
-$Maxwell
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