Consider these two scenarios: Suppose you had invested your nest egg in stocks at the peak in 2007 and held it for the past 10 years. To date, you would have generally experienced a total return of +63% (roughly 5% compounded) encompassing all the good and all the bad. On the other hand, consider that you had participated in the panic sale at the bottom and bought treasury bonds which many people believed to be the safer option. You would have just now recouped half of your losses, with about 75% of your principal intact. This is before you consider taxes. The IRS taxes interest on bonds at about twice the tax rate compared to gains or dividends in stocks. If this were an actual situation, you would have a disparity of more than 100%.
Many people blame stocks for producing disappointing results, but the truth is that they perform just fine for those who don't sell out at the bottom. Staying all in when it's scary is part of what separates the investors from the savers.
Here are a few other characteristics that separate investors from savers:
- Investors do not require predictable outcomes.
- Investors act; they don't react in order to suddenly do what's already too late.
- Investors understand peaks and valleys are better than a guarantee.
- Investors stay clear of get-rich-quick-schemes.
- Investors are more optimists than pessimists.
- Investors understand that you can't get something for nothing.
My goal with this musing is to encourage introspection so that you can adopt a permanent long-term investing philosophy . . . no matter what.