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The Power of Doing Nothing OR Everything Old is New Again - Part 3

The Power of Doing Nothing OR Everything Old is New Again - Part 3

| January 18, 2023
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Last week, we embarked on a discussion of the first three of what I’m calling the Grover Top 10 Principles of Long-Term Investing OR The Keys to Investing Resilience. This week we will look at three additional keys, and by the time we are through, at the end of next week’s blog, you will have ten very solid and fundamental investment principles on which to build the rest of your very intentional, thoughtful, and long-term investment plan. So, without future ado, let’s begin. 

4. Having a long view helps avoid short-term mistakes.

Let me begin today’s discussion on the importance of a long-term approach by stating the painfully obvious point that there is no such thing as a “get-rich-quick” scheme, and by the same token, there is no magic bullet or single stellar investment that will get you from “average joe” to millionaire without time, patience, and discipline. Why? Because building real wealth takes time. And that is one thing you have that costs nothing - time - so you might as well use it to your advantage. 

Historically, investing in stocks has been one of the best ways to build wealth because of their long-term growth potential relative to bonds and/or cash. Yet many investors underinvest in stocks or try to time the market. In either case, investors could be missing opportunities. That’s because, over long periods of time, the stock market has historically generated positive returns. If you don’t believe me, take a quick look at the chart below.  

This chart shows us in no uncertain terms that stocks have generated positive returns 100% of the time over 20-year periods as of 12/31/21. That is not something I would want to miss out on by not being fully invested in the market, would you?

5. Compounding is key.

Compounding is just about the most simple and effortless way you can make money. I’m serious; you don’t have to do anything - in fact, that is the key - doing nothing. Here’s why. Compounding occurs when your investments grow, and those earnings, either gains or income, are reinvested to generate additional earnings. Compounding gains and income over the long term is what typically drives most of the value in an investment or portfolio. If you aren’t convinced, take a look at what happens to an investment of $1,000.00 over multiple ten-year increments.   

As you can see, regardless of your tolerance for risk or the average annual return of your portfolio, compounding helps your money earn money. And that just makes good sense.

6. Diversification is critical.

Of course, I can’t leave this week’s discussion without going to the “wayback machine” one more time and reminding you that when it comes to investing and the markets, it is impossible to pick the winners and losers. However, there is something you can do to bring a measure of balance to your investments, and that is to make sure your portfolio is properly diversified. 

What can diversification do for you? Diversification spreads your investments between asset classes that perform differently. Potentially, strength in one asset class can offset weakness in another. In down markets, diversification may help your portfolio lose less value than the market. In up markets, diversification can help your portfolio take part in market gains.  

Join me next week when we will wrap up this month’s series on the keys to investing resilience with the final four tips on taking a long view in your financial plans. 

Until next time…

One last thought, I believe an educated investor is an empowered investor. If you like what you’ve read and think your friends and family can benefit as well, please share.

 



The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested in directly.

All investing involves risk, including loss of principal. No strategy assures success or protects against loss. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.

Dollar-cost averaging involves continuous investment in securities regardless of fluctuation in the price levels of such securities. An investor should consider their ability to continue purchasing through fluctuating price levels. Such a plan does not assure a profit and does not protect against loss in declining markets.

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