What Other Industries Teach Us About Investing

This entire 45-minute presentation is worth watching, but I’ve chosen to begin the video at what I consider to be the most important aspect. Watch this video and you will see why YOU are your biggest enemy when it comes to investing.

The markets have enjoyed great returns over long periods of time, but individual investors have seen far worse returns, why? Fear.

Long-termĀ returns are negatively impacted by volatility. People typically sell at the worse times; when the markets are declining. They sell out of fear. As Warren Buffett says, to be a successful investor, you need to be greedy when others are fearful and fearful when others are greedy.

The easiest thing for most investors to do is stay the course. Over the long haul, you will likely make more money than if you try to time the market. What people usually do is sell when times look bleak, like those large red areas in the chart in the video.

You need to have a long-term outlook. Later in the video (around the 47:00 mark) Housel displays the chart below.

This chart shows the largest and smallest returns that you could have experienced by investing in the S&P 500 during the 140+ years from 1871 through 2012. The first column shows that the largest one year gain would have been 53% and the largest one-year loss would have been 38%, but if you were to hold for even one more year, your loss dramatically decreased by about 10% to about 28%. The longer you hold on to your investment, the lower the likelihood is that you would see negative returns.

By holding for 20 or more years, you wouldn’t have any losses. (Of course, history doesn’t ensure the future…) Try to think long-termĀ about your investments.

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