Finance 101 – Investing For The Long Run

This article forms part of a recent TW3 newsletter, you may view it here.

In James Thurber’s classic short story The Secret Life of Walter Mitty, a mild-mannered man escapes his mundane life by daydreaming that he is a trailblazing hero. One moment Walter’s wife is reprimanding him for driving too fast on the highway; the next, he is a courageous pilot WW2 embarking on a daring mission to attack a German ammunition dump.

Most retail investors have much in common with Walter Mitty when they estimate their risk tolerance, imagining themselves holding steadfast during a major crisis without breaking a sweat. More often than not, when push comes to shove, they aren’t as brave as they thought, nervously monitoring their bleeding portfolio before capitulating and selling at the worst time.

If our portfolio drops 20%, should we buy more shares? Or do we need to get out quickly before the 20% loss turns into 40%? After all, every 40% drop was once a 20% drop! You can hypothesise how you’d act in these scenario, but to quote Hamlet if he became an investment adviser “Sell-offs make cowards of us all. When everyone else is losing their heads, its very hard not to get caught up!

This is why the platitude “invest for the long-run” is misguided, as the long-run is a rollercoaster of short-runs. In the last 20 years Australian shares have averaged 10% returns, but very rarely do you have an “average” year!

australian share returns since 2000

Our goal at Stanford Brown is to help you achieve your financial goals (more on goals later!) with fewer, shorter, and shallower setbacks along the way. It’s all well and good to hypothesise how you’d act in testing scenarios, but we’d rather avoid them altogether!

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