Everyone has heard the story of the tortoise and the hare. To sum it up: a tortoise and a hare set out to race. The hare, ever confident that he’s obviously faster than the slow-poke tortoise, takes several breaks throughout the day, gets distracted, and loses time in several interesting and ill-fated ways. Throughout his run, he’s still sure that he’ll beat the tortoise, despite his many detours.
Yet, the tortoise continues to plod along slowly but surely. Because the tortoise is focused on his goal, he ultimately beats the distracted hare.
Michael explored the moral of this story in one of our most-read blogs, and today we want to take it a step further by discussing:
What does moving slowly and intentionally mean for your investing?
It’s not a secret that our team at WDW Financial are all believers in long-term investment planning. In other words, we abide by the old adage that successful investing is all about time in the market, not timing the market.
But what does that look like in practice, and how does long-range investment planning work for investors? Let’s dig in.
The Hare: Short-Term Mindset in Investing
In the world of investing, the hares get all the limelight. On any given day, there are reports on hot stocks, market trends, and the latest “sure thing” (does anyone remember the GameStop stock phenomenon of 2021?). It’s easy for investors to get overwhelmed by the constant clickbait content that’s being thrown at them. However, those who attempt to time the market risk long-term failure. The dangers of a shortsighted investment approach include:
- Emotional decision making: It’s difficult to make the best decisions under pressure. If you’re feeling emotional about your portfolio, it probably isn’t the time to buy or sell in response. Your emotions can push you to make a knee-jerk decision that doesn’t align with your unique financial situation or long term goals.
- High transaction costs: Attempting to time the market usually leads to frequent trading, which comes with costs that can quickly accumulate and erode your profits.
- Poor timing: The truth is that by the time you hear about a trend, it’s probably too late to jump on the bus. Short-term investing or day trading is more akin to gambling than true investing. For every “big win” we see or hear, there are often many significant losses that are not being talked about.
- Higher tax burden. Making quick profits through day trading can lead to a significantly higher tax bill. Because short-term gains are typically taxed at a higher rate than long-term investments, frequent trading can increase your overall tax liability and diminish your net returns.
- Limited compound growth. Like a snowball, interest compounding takes time to pick up speed as it rolls downhill. If your portfolio isn’t left to grow on its own, you are limiting the potential benefits of this powerful growth strategy.
The Tortoise: The Power of Long-Term Investing
Although markedly less exciting, long-term investing is the path WDW Financial takes for all of our clients. After all, the tortoise won his race against the hare for a reason!
In general, there are three core benefits of long-term investing we preach to clients:
- Riding out market cycles and volatility. When investors try to time the market, their gut instinct is often to move to cash or to sell off shares during a downturn. However, this can result in missing out on the recovery that often occurs right after the corrections. Long-range planning in your portfolio means that you’re less likely to mistime the market, and lose out on potential gains by doing so. In fact, investing when the markets are “on sale” is a favored strategy for capitalizing on a market downturn.
- Compound interest. Compound interest is a powerful force that can significantly boost an investor’s wealth over time. It works by earning returns not just on the initial investment, but also on the accumulated interest from previous periods. This snowball effect can lead to exponential growth, especially over long time horizons. By reinvesting dividends and interest payments, investors can harness compound interest to potentially achieve greater returns compared to simple interest alone.
This hypothetical graph is not indicative of any specific investment and it does not reflect fees or expenses.
- Historically better returns. Over time, the stock market generally trends upward. Investors who commit to staying in the market for the long haul are more likely to come out ahead than those who attempt to time the market at its peaks or valleys, missing out on the inevitable “bounce back” that comes with time. Take this example from the S&P 500 over the last several decades:
The Benefits of Dollar-Cost Averaging: The True “Tortoise” Strategy
Are you looking for a way to put long-term investing into practice but find yourself caught up in the emotional rollercoaster of market volatility? Dollar-cost averaging (DCA) might be the right approach for you.
Dollar-cost averaging (DCA) is an investment strategy where an investor regularly invests a fixed amount of money at regular intervals over an extended period, regardless of market conditions.
The primary benefit of dollar cost averaging for long-term investors is that it reduces the impact of market volatility on the overall investment. When the market is down, the fixed dollar amount buys more shares, and when the market is up, it buys fewer shares. Over time, this approach can potentially lead to a lower average cost per share compared to a lump-sum investment.
Working with WDW Financial
Money is more than a number on the page – It is tied to your goals, values, and future plans. The fear of making a mistake can get the best of even the most seasoned investors, which can lead to irrational investment decisions.
This is where partnering with a financial advisor can make a difference. Our team of specialized investment professionals is here to help you craft a personalized plan tailored to your goals. We also serve as a trusted resource, providing guidance and reassurance during the inevitable market fluctuations. We can help you establish a consistent investment strategy, protecting you from the risks of trying to “time” the market or manage your portfolio on your own.
If you have questions, we’d love to hear from you. Reach out to us today by clicking here. You don’t have to navigate this journey alone. Together, we can embody the tortoise’s principles as you race toward your future.