As investors in the stock market for around 8 years, the founders of Lion’s Den Investments LLC, can shed light on this debated topic of short term vs long term investing.
The markets over all have been on an upward trend since 2008, with the longest bull market in history playing out before our eyes. It’s not without saying though, that along the way we have seen some unprecedented swings to the downside too.
Very few investors have made fortunes and even more day traders have lost money. Why is that?
In this article were going to discuss this topic and why we believe that long term investors always reap the rewards in the end. We will explore some of the reasons why we believe this and point out some of the top long-term investments that seem to have the track record for a successful investing strategy.
Short Term vs Long Term Investments
First let’s define what qualifies for a short-term investment and what qualifies as a long-term investment so you know the difference.
Short Term Investments – These are considered investments you make and plan on selling within a short amount of time. According to myaccountingcourse.com, it’s also referred to as a temporary investment or marketable security that can be sold or converted to cash for a return in 3 to 12 months time frame.
Long Term Investments – These are investments that you plan on holding for longer periods of time, like 5 years and over. An example of a long-term investment would be your 401K plan. It can be 1 asset or multiple assets that you hold with no intent on selling in the future.
Now that you know the technical definition of both, the next thing to discuss here is which one is better? Which one gives better returns, and which one is a safer approach?
It really depends on the individual and his or hers risk tolerance.
If you aren’t familiar with risk tolerance you can check out our last post where we cover what risk tolerance is and how to assess your risk tolerance before investing your hard-earned money.
If you are someone with a high-risk tolerance than perhaps short-term investments might be a good fit for you. What we can tell you from our own experience, is that the shorter the time frame for the investment to make a return for you, the higher the risk of losing your money.
This leads us into the next topic with the long-term approach and why we think it’s safer and reduces your risk as an investor.
The Investing buy and hold strategy
There are many famous investors throughout history from Warren Buffet to Paul Tudor Jones that have said, “the buy and hold strategy is the surest way to build wealth as an investor.” 
Our experiences with day trading, holding short term investments and long-term investments has confirmed this statement is TRUE.
The reason it holds so much substance is because as investors, we tend to let our emotions play into our decision making process. It’s simply human nature for us to feel an emotional attachment to our money and for most of us, it’s extremely hard to ignore our emotions.
It’s because of this very fact, that we tend to panic when our investments drop in price because we feel the emotional pain of losing money. What we don’t realize is that we haven’t lost any money until we SELL the asset. The problem most investors have is that they buy HIGH and sell LOW!
The SCARY truth about professional day traders
You watch the movies from Hollywood and read the headlines in the news of the high-flying stock traders of Wall Street. You see or hear of the lavish lifestyles of the hedge fund manager who ranked at the top of the list, as most successful day trader of the year on Wall Street.
Don’t be fooled by this media bias, of the lifestyles of day traders on wall street who strikes it BIG.
The truth is…. According to Standards & Poors research report for 2017, statistically your ODDS are 1 out of 20 when picking an actively-managed domestic equity mutual fund, that will beat the benchmark annual return of an Index Fund like the S&P 500. If we do the math on 1 out of 20 odds, that equals 5%.
This means only 5% of the actively managed funds will beat overall market returns from an Index fund and this is based on a single year.
NOTE: (An actively managed fund is technically managed by professional day Traders and this statement was exposed by Vanguard during the interview from the Tony Robbins book “Money Master the Game”.)
Based on this data, we aren’t saying that it’s not possible to beat the market returns in a single years’ time.
In fact, we know that’s possible because just last year we had an annual return of 300% on our investments. However, this year has been a totally different story as we are only up 30% for the year. We also had to look elsewhere besides the stock market to get these returns and our RISK went up substantially. The odds of us getting these types of returns next year are decreasing by the minute to say the least.
So, when you think about the ODDS of beating the markets and getting huge returns like the “trader of the year” on Wall Street, just remember that more than likely that won’t be the case for most of us.
It’s a media bias fairy tale and you might as well go play the lottery because your odds of hitting the lottery are just as good there.
The point here, is that TIMING MARKETS does NOT WORK! Most traders are terrible at trading. They simply cannot predict the short-term swings in markets due to their emotions getting the best of them.
What is the solution to timing markets?
First and foremost, it helps when you understand some simple facts about the performance of the overall stock market.
Secondly, try to stay in the markets even when they go down in value. It won’t make you rich overnight but if you stay in the markets and take advantage of compounding interest it will pay off further on down the road.
We have listed some important historical stock market FACTS below that we think you might find interesting before we move on and you continue reading. Remember these facts as we cover the rest of this debate.
Stock Market Performance Facts:
- Historically, every year the stock market will go through a correction or a 10% drop in overall value of broad markets.
- Historically, every 8 years marks the end of a business cycle and the start of a new one.
- A recession is considered a 20% drop or more in the overall stock market value.
- If you were fully invested in the S&P 500 from 1995 through 2014 you would have an annualized return of 9.5% year over year.
- Since 1928 the market has given over 10% returns 51 times.
- The S&P 500 has gone down just 24 times in that same period of time.
- The markets highs are more extreme than its lows.
- The bad years are almost always followed by good ones.
- In 2008 the S&P 500 fell by around 37% and then went up 32% by 2013. In 1931 the market fell 44% only to turn around and go up 54% by 1954 and another 43% just 4 years after that.
- We have had 24 years where markets reported negative returns and 16 of those cases were followed by positive returns the following year.
Why do most investors lose money?
We have touched on this at the surface already, but we will touch on it again here briefly. It comes down to investors emotions getting the best of them.
The emotions investors feel and experience usually begins with a thought. They doubt themselves or start asking themselves questions such as the following:
Since I’m down 30%, should I stay in and risk losing all my money?
Will I ever be able to get my money back?
They try to stay in the markets when they are going through a recession or the market drops by 1200 points in a single day and these types of thoughts start creating a negative emotion. This leads to the ultimate mistake of committing to negative ACTIONS or selling their long-term investment and sitting on the sidelines.
Therefore, most investors lose money because they are afraid to get back in after they have sold at the low. What they fail to realize though, is what historically happens afterwards.
The market turns around and makes incredible gains over the coming years making up for all their losses and some. Not all the time but a majority of the time, the market makes a quick come back.
The emotional scar that is left may take years for them to recover from and all that time goes by, where they could be reaping the rewards of the markets rebounding.
Then comes the moment, say like 8 years later, where they start to think to themselves…“well the markets are safe again so I can get back in.”
What they are failing to realize is that it’s 8 years later and another business cycle is coming to an end and they are buying at the HIGH’s. This is a hypothetical scenario of course but it happens more often than one would imagine.
This happens over and over to investors and they go through the whole experience again and again. Buying High and then the markets turn over and they SELL on the lows to lose money.
How do you stay in the markets?
How do you avoid these common mistakes we have covered in the above paragraph and how do you overcome your emotions? Next time your long-term investments take a nose dive because we go through another recession, remember the Stock Market Facts we laid out here.
Think of it this way…What are the ODDS that the U.S. stock market and all of the major 500 large corporations will cease to exist tomorrow or 40 years from now? It’s all about ODDS with investing and how do you improve your ODDS? It’s simple, you diversify to reduce your RISK and invest in the overall broad markets with this very disciplined mind set.
What are the top long term investments
There are many different hedge funds and mutual funds you can invest in which give you exposure to the stock markets but before you invest; It’s important to remember what we talked about regarding actively managed funds.
If it’s actively managed there are some things you need to consider or be aware of.
- What are the fees? – FEES are associated with the fund because the people managing it or “trading assets” in and out of the fund NEED to get paid first.
- If they are trading in and out of the fund, they are technically day traders. If they are day traders, what are their ODDS of matching market returns of an Index? Answer – 1 out of 20 or 5% odds
These would be the top 2 main considerations and of course we could go on and on with Fees and other things to consider but let’s stick to the point here.
There are just a few top long-term investments that we would recommend. These recommendations are Index funds because it’s what has WORKED for the giants of investing over the last 100 years.
INDEX FUNDS – Index funds are funds such as the S&P 500, DOW Jones Index and the NASDAQ Index.
How do they work?
They measure the overall performance of broad markets or an industry sector in the U.S or internationally, and they have very little FEES associated with them. There are a few that have no active managerial duties associated with them as well.
In fact, with the S&P 500, there are multiple Index funds out there that track the market’s performance. The lowest cost S&P 500 Index funds have an expense ratio of less than 0.1% and there are 12 of them at the present time.
An expense ratio of 0.1% means that an investor would pay $1 or less in FEES for every $1,000.00 invested.
By reducing the FEES, Reducing the RISK and staying in the markets and reaping the rewards of compounding interest… your ODDS of becoming a successful investor are multiplied by 100 times that of a short-term investor or a day trader.
Not to mention, you are basically making a bet that America and the rest of global markets will be in business 40, 50 to 100 years from now.
In our opinion, those are great ODDS that are in your favor as an investor. If you have any other suggestion for good index funds for investors please feel free to share them with us in the comments below. Let us know what your opinion is on Index Funds as an investment tool.