magine three investors who each start out with $10,000 invested in the S&P 500 on January 1, 1979 and must stay fully invested until December 31, 2018.
S&P 500 INDEX ACTUAL MONTHLY RETURNS UNDER VARIOUS SEQUENCES (JAN 1, 1979 – DEC 31, 2018)
Source: S&P Dow Jones Indices LLC
Our first story begins when Lucky Lucy invests $10,000 in the stock market and has nothing but positive monthly returns for an astonishing 26 straight years, in the process becoming a millionaire in 5 ½ years and gaining worldwide notoriety for her impeccable market timing. Her massive wealth and fame peak at $283 Million, but then she can only watch it all fade away as tragedy crushes her wealth. Loser Larry, as should be expected, invests his $10,000 the day before Black Monday and then proceeds to be beset by the worst financial catastrophes in recent history. His doomed investment dwindles down to 12 cents, his car explodes, his house burns down, and his dog runs away. After years of agony, he finds a four-leaf clover and his wealth accelerates upward with all the gains coming in those last heady years. Finally, there is Reality Randy, who invested in the real world, where all the things that happen in the real world happen when they should, and his wealth grew steadily over time with occasional pullbacks and surges.
The real world doesn’t seem so bad when compared to the extreme stories told above. But regardless of the story, the main point is that the sequencing of investment returns does not matter for long-term investing. All three of our fictitious investors ended up in exactly the same place financially. We have no control over the timing of world events or how the market will react to them. The real driver of long-term wealth is the amount of time spent in the market and the power of compounding. So, stop fretting about current market conditions and stay focused on the destination, not the journey, when it comes to your long-term growth portfolio.
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