The Tortoise Beats the Hare: A 23-Year Study of Patient Investing

Let’s talk about two stock charts. Don’t worry, it won’t take you long. Pictures can tell a lot, but I’ll keep my commentary fairly brief.

The long term vision

^SPX data by YCharts

The blue mountain in the background is the total output of the popular S&P 500 (^GSPC 1.15%) The stock index has gained an average of 7% per year over that period. That may not sound like much, but those modest gains have added up to a total return of 411% over 23 years. Not bad, considering the relatively modest annual returns are below the S&P 500’s long-term averages, let alone the 13% average returns over the past 10 years.

The green overlay shows you the annual returns of the same index for each year. This includes the dot-com bubble burst and the 9/11 attacks. The deepest annual decline came during the Lehman Brothers subprime mortgage meltdown in 2009. The 2022 inflation-fighting measures looked terrible at the time, but they don’t seem too painful in this perspective.

And all these temporary declines were followed by good years – not necessarily right awaybut regularly enough to quintuple your average stock investment over time. You did even better if you bought your shares in an S&P 500 index tracker such as Vanguard S&P 500 Exchange Traded Fund (VOO 1.08%) Or SPDR S&P 500 Exchange Traded Fund (SPY 1.06%) in the lows of 2003 or 2009, but the overall returns would be fantastic today even if you had made a big investment at the local peaks of 2000 and 2007 – arguably the worst times to enter the market at that time.

Time and patience can heal all market wounds.

What about daily travel?

Next, I’ll zoom in a little bit. The next chart does the same thing, but over the last year.

As before, the light blue mountain shows the S&P 500’s total returns over the entire period. The green squiggles represent gains or losses for each day during the period:

^SPX data by YCharts

The numbers are smaller because you are looking at a shorter time period. There are 252 trading days in this chart, so the average daily return was about 0.1%.

Big declines are, of course, more modest. Last week’s Japanese interest rate hike only caused the market to decline 3%, for example. These declines can be painful, but the S&P 500 has already recovered from last week’s series of price declines. And those tiny daily average moves of a tenth of a percent have resulted in a pretty impressive 30% total return over 52 weeks. Math for fun and profit!

Much like the 23-year chart, this single-year analysis shows that short-term market movements don’t really matter in the long run. Instead, you may want to pay attention to sudden spikes in the market so you can postpone any trades you may have planned, and surprise dips so you can take action while prices are low.

Lessons learned from this graphical analysis

It can be fun to keep up with market news. It can teach you valuable lessons, especially in financial analysis and recognizing long-term trends. Don’t worry too much about the fluctuations of a particular market day. Full years are more important, and the real secret to successful wealth creation is the compounding returns of patient holding over many years.

Time is your best friend on Wall Street, although you can’t guarantee a steady stream of big returns in the short term. The S&P 500 index funds I mentioned earlier can help you get there with a generous dose of risk-mitigating diversification. Buy and hold, my friend. Buy and hold.

Anders Bylund holds positions in the Vanguard S&P 500 ETF. The Motley Fool holds positions in and recommends the Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.