I’ve found that short term investing is a losing game. In fact, I wouldn’t call it investing. It’s more like gambling.
Back in 2020, everyone was excited about Gamestop. We heard about regular people like us making unheard of fortunes overnight. Everyone was getting rich.
Then came the stories of the folks that lost their shirts. They got in too late. They bought at record highs expecting the exponential growth to continue. Even worse, they borrowed money to buy shares, or they traded derivatives that promised to multiply their gains, not understanding that it also multiplied losses.
Sad.
Put Your Money…
I wrote a post back in February of this year called Put Your Money Where Your Mouth Is. I invested $100 in SPY – an S&P 500 index ETF and explained all the reasons why I expected this investment would generate wealth in the long term.
I wrote
But, I put up real money because I believe that anytime is a great time to invest in the 500 largest US publicly traded companies. Here’s why.
Ouch
I wrote a 2 week update here. Since a picture is worth a thousand words, I’ll show you how things were going at that point.
And then…
By July 4, things had turned around and I was ahead. Read about it here.
…but this is still very short term.
Ideally, investing is 20, 30 or 40 years. It’s at least 3.
History teaches us 2 important lessons. (well, probably more, but 2 that are relevant here.)
- The S&P 500 has returned 10% per year on average with dividends reinvested over the past 100 years or so.
- As we hold our investments for longer periods, the probability of us matching or beating the averages increases quickly.
- The odds of being ahead after 1 year are 50-50, but every year after they increase rapidly.
So I’ll keep watching and reporting on the status of my $100 investment.
Another Example
A few weeks ago, I got a bee in my bonnet about energy. We seem to use a lot of it and people like it. You can read a more eloquent analysis here.
I bought 7 energy stocks.
Here’s my wrap up.
And 2 weeks later, all but 1 of the 7 are down. The worst is down 4.68%.
Investing is a long game.
I don’t invest money I can’t afford to lose. I know that sounds strong, but here’s my thought process.
- It’s not likely any investment will go to zero. It could, but I’d likely get out before.
- I know full well from painful experience that some of my investments will drop 90% in value (sheesh!)
- I’m diversified across stocks, stock funds, bonds and cash to limit my risk
- My big winners more than make up for the few that have dropped 90%.
I still think the energy story will play out in my favor over the next 3 years. I am disappointed with the start. It would be great if some of these popped right away, but for me, that never seems to happen.
Wrap Up
Investing can test our patience and conviction. Even the best companies and funds pull back. Sometimes BIG.
Don’t do the crime if you can’t do the time.
If we can’t afford to stay invested for the long term, maybe we shouldn’t be investing this money.
To be clear though, we all need to invest to grow our wealth. We just need to be sure we aren’t risking the money we need to pay next week’s rent or tomorrow’s grocery bill.
Set aside some cash and invest it wisely. I love a nice low-cost S&P 500 fund or ETF – but still expect pull-backs from time to time.
The ride will be rocky. Be prepared, but history has shown that we’re likely to end up ahead if we hold on.