Principles of Sound Investing: Consistency

When you listen to financial news commentators, it can feel as though financial markets and investment decisions are capricious and arbitrary. Over the short term, that might be accurate. However, over the long term, there are universal investment principles that may ultimately help govern your success and which guide all of our wealth management and investment decisions.

Adhering to principles like balance, consistency, and courage will help you stay on course and provide a buffer from the constant drone of crisis and fear promoted by some news and media outlets.

While I’ll share info about all three of those principles of investing (you can read more about the other two, courage and balance, in their own posts), we’re going to start with consistency.

Investing With Consistency Brings Long-Term Results

Humans are not fans of consistency, yet it’s one of the most powerful principles of investing. I cannot tell you how many clients I’ve worked with over the years who have kicked themselves for taking their money out of the market at the wrong moment. If you’ve done it, you’re not alone but we want to help make sure you learn from past mistakes. Exercising the principles of discipline and consistency in the long-term investment strategy gives you the best opportunity to achieve long-term success.

One of my biggest aha’s in my life as a financial advisor has to do with this idea of the 30 best days in the market. If you missed these days from 1995-2020, your S&P 500 Index annualized return would’ve been less than 2%. If you had stayed invested (AKA were consistent), your annualized return would be closer to 9%.

No one knows when these days are going to be, but the best days in the stock market over the last 25 years tended to cluster together, therefore are easily missed if you’re yo-yo-ing in and out of the market.

Consistency in Understanding Investing Patterns

Six of the top 30 days for US stock returns since 1995 occurred during the COVID outbreak. 80% of the best days in the market over the past 25 years happened during the tech wreck, the financial crisis, and during the COVID outbreak together.

Markets form patterns because there are humans in the driver’s seat. Even trading models are built by people. Investors try to squeeze insights out of data and shape it into a story, often without causation. No one has a crystal ball, but they act like they do!

Over the long term, stock prices are determined by corporate earnings not market headlines. That’s just the reality of the situation. They reflect partial ownership in real companies (and these companies have real products, services, and earnings!). The performance of those stocks simply reflects the performance of those companies over the long term.

It’s important to note that over the short term, stocks can reflect all kinds of external circumstances, but from 1957 to 2019, there was a 0.97 correlation between the S&P 500 Index and S&P 500 Index earnings.

In other words, a very high correlation. A much higher correlation than the trading models and stories investors like to form!

This is why consistency is a tent-pole principle of investing. The short-term external factors are nothing compared to the long-term correlation. The longer you stay invested, the greater chance you’ll make sound choices with companies that historically perform well. Further, you won’t have to play the crystal-ball guessing game with where the best days will happen.

Investing Isn’t Like Gambling

Investing isn’t like gambling. The longer you stay invested, your odds of making money increases (whereas in gambling, the opposite is true). The odds of winning the most popular games in Vegas never reach 50%. However, over rolling monthly one-year holding periods, the stock market has been up 73.5% of the time.

The longer you stay at the “stock market table,” the more likely it is that you’ll have positive returns. For example, over rolling monthly 15-year periods (e.g. January 1901 to January 1916, all the way up to December 2004 to December 2019), stocks were up 99.9% of the time with the only nine down periods coming during the Great Depression.

Six of the 30 best days since 1995 happened last March (March 2020). Everyone was taking their money out of the market because they were scared. Then, all of a sudden, the market snapped back.

What makes that so important is that people took money out of the market and they missed those best days. Historically, US stocks have had the greatest impact on investment results. Looking at 20-year annualized returns from 1999-2019, the US stock returned 6.1% versus an average investor return of 3.9%. Why the difference? Those investors literally missed the best days because their money wasn’t in the market.

At The End of the Day… 

While historical performance does not guarantee future results, a historical perspective is helpful in informing investment decisions. Looking at correlation and patterns over the long term will set you up for success. And when looking at the principles of sound investing, consistency is a major indicator of success.

I’d encourage you to take my free assessment to see if you’re on track for building the financial wealth you need to live your best life and apply the consistency principle of sound investing when investing so you can maximize your wealth in the long term.

Learn about the other two principles of sound investing, courage and balance!

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