Investing is a journey

Investing for the long term is akin to embarking on a cross-country road trip. Imagine driving across diverse landscapes, facing changing weather conditions, unexpected detours, and occasional bumps in the road. Similarly, in the investing world, a long-term approach involves navigating through various market cycles, economic shifts, and unforeseen challenges.

In this metaphor for investing, your portfolio is the vehicle that propels you toward your financial goals. Now, consider judging the success of your journey by analyzing the performance of every kilometre rather than evaluating the overall progress toward your destination. If you constantly scrutinize each twist and turn, every rise and fall in the road, you might become anxious and  react impulsively to short-term fluctuations.

Investors often hope for consistent, positive returns, but the reality is that market returns are rarely a smooth, linear progression. 2023 was a great example of this, with the TSX, S&P 500, and MSCI index generating the most positive returns year-to-date in January and November, respectively.

Even over the long term, calendar year returns can deviate significantly from a portfolio's annualized return. The chart below, the FTSE All-World Index (1994-2022), illustrates that calendar year returns are rarely close to the long-term average return in a given year.

While the lumpy nature of returns is inherent in financial markets, the consequences of missing the best market return days can be profound. 

Many of us have been to a new travel destination, where we can witness breathtaking sights every day. However, you can unintentionally bypass the most awe-inspiring sights due to an impulse to fast-forward or take detours.

In the world of investments, the best days in the market are like those breathtaking moments on your journey. These are the days when the market experiences significant upswings, contributing disproportionately to the overall growth of your portfolio.

Consequently, a disciplined, long-term investment approach that remains invested through market ups and downs is crucial for capturing the full benefit of positive market movements.

The best market return days are often concentrated in periods of market turmoil, and if you are not invested at this time, you may miss out on substantial gains. Here are a few key points to consider:

Market timing is difficult: Trying to time the market by getting in and out at the most opportunistic  times is challenging. Even experienced investors and professionals cannot consistently predict market movements.

Impact on long-term returns: Missing just a few of the best days in the market may notably impact your long-term investment returns. Studies have shown that a substantial portion of market gains are concentrated in a small number of days.

Compounding effects: The power of compounding is crucial for long-term investors. If you miss out on the best days, you lose the potential gains on those days and the compounding growth that would have resulted from those gains over time.

Emotional impact: Trying to time the market can lead to emotional stress and anxiety. Making decisions based on short-term market movements is difficult, and emotional reactions can often result in poor investment choices.

Staying invested for the long term: Generally, a long-term buy-and-hold strategy is more effective for individual investors. By staying invested through market ups and downs, you are more likely to capture the market’s overall growth.

Diversification matters: Diversifying your investments across different asset classes can help reduce risk. Even if you miss out on the best days in one market, you may still benefit from positive performance in other areas of your portfolio.

It’s important to note that while missing the best days can be detrimental to returns, attempting to time the market carries its own risks. Consistency and discipline in your investment strategy, coupled with a focus on your long-term financial goals is the ideal strategy. 

The true measure of success lies not in the daily or monthly fluctuations but in the overall progress made over the entire journey. Investors who consistently evaluate their portfolios with a long-term perspective are better equipped to weather the occasional storms, make informed decisions, and ultimately reach their financial destinations with greater confidence and success.

If you have concerns or questions about your investment strategy, it’s advisable to consult with your Investment Counselor, who can provide personalized advice based on your individual circumstances and goals.