Tee Up a Smart Strategy: Invest Long Term

In July, golf becomes important to us: The American Century^® Championship celebrity tournament raises money for medical research aimed at defeating life-threatening disease. And we may get a little starstruck over the 90+ sports and entertainment celebrities who join the fun and compete for a cause that touches everyone.

But investing and golf have a lot in common all year round. Both need careful decision making, strategies to avoid hazards and a focus on the long game. In fact, it’s how our investment teams manage their portfolios.

How does it apply to you? Financial consultants Amy Alley, Rowland Pepito and Jennifer Simmons give their top three observations on why your long game is so important.

Long-Term Investing Is Key to Building Wealth

Holding an investment over time is an important strategy, but it takes patience and discipline. And it could mean taking on more risk to potentially get the rewards you want down the road. There will be hazards and bumps along the way, but often an investor’s best friend is time.

Is Long-Term Investing Worth It?

“Let’s look at one of the world’s most famous investors, Warren Buffett, to answer that,” says Rowland. According to The Psychology of Money, the key to Buffett’s success is that he’s been investing diligently for 75 years. The author says, “Had he started in his mid-30s and retired in his 60s, few people would have ever heard about him.”¹

Time is a huge factor for any investor and focusing too much on the short term can agitate you more than help—especially during volatile markets. “Investors often want quick results, but it could end up hurting their portfolio,” says Jennifer.

Plus, it can be hard to make up for lost time later, and some people try to catch up by adding riskier investments. “But that can add too much risk,” she says. “Why go 90 mph to your destination when you could start earlier and go 60 mph at a steadier, less risky pace? It’s all in the planning ahead.”

Our future value calculator is a good way to see how a long-term investment can add up over 30 or 40 years.

What’s Wrong With Testing Out an Investment?

Testing a long-term investment for a short period will likely not give you a realistic picture of that investment’s potential over time.

When you’ve been investing a while, you start to understand how powerful long-term investing can be—and you don’t sweat the day-to-day market activity. “Some of my clients with the most money rarely look at their statements,” says Amy. “Those clients have removed their emotions from the equation. But it’s not always easy to look away. If it was, everyone would stay invested!”

How can investors feel comfortable looking away? By understanding how compounding works. They are more confident riding out volatility and know the stock market’s history of performance over several years.

Does It Matter What I Invest In Long Term?

Yes. Investing long term means ideally having investments designed to grow. “I see too many people investing for years in products that are better suited for the short term, like cash equivalents,” says Rowland. That’s not to say you don’t need short-term investments for short-term goals. It just shouldn’t be your only focus, especially when you have a goal like retirement.

Too much focus on short-term results can cause you to invest in a trend (that may not play out) or a product that was never meant to be a long-term investment. For the latter, much of that could be because people don’t like risk. They’d rather play it in a way they perceive to be safer. “When you focus on short-term volatility, it may put you in a position to take on too much risk or not take enough,” says Jennifer.

Investing in short-term investments with a long-term approach doesn’t typically work. The short-term investment will likely not keep up with your growth needs, or with inflation, especially now. Yes, you may take on more risk with a stock fund, but you also likely have the luxury of time to help overcome downturns.

Historically, stocks have helped investors with growth. Bonds and cash equivalents, like money markets, have their place in a balanced portfolio but they may not help build the wealth most investors are looking for, as shown in the chart.

Stock Investments Have Historically Shown Growth

Note that the hypothetical chart reflects a one-time investment of $10k. Adding consistent investments over time would considerably change the results.

^{Growth of $10,000 in various asset classes. Source: FactSet, data from 12/31/1979 to 5/31/2023.
Hypothetical value of $10,000 invested at the beginning of 1980. Assumes reinvestment of income and no transaction costs or taxes. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. Past performance is no guarantee of future results.
U.S. stocks are represented by the S&P 500 Index. U.S. bonds are represented by Bloomberg U.S. Aggregate Bond Index. Money markets are represented by the FTSE 3-Month U.S. T Bill Index.}

Keeping a Long-Term Focus: What Are the Sand Traps?

The hazards that keep people from investing long term are varied. But understanding them may help you avoid them on your own investing journey.

“One of the sand traps I see is not planning for emergencies,” says Amy. “When you don’t have an emergency fund, you could be tempted to dip into your long-term investments to cover the crisis at hand.”

Another hazard is being over-invested in one stock. When thinking about golf, you don’t take one club to the course, you take the whole set. One club won’t meet all your needs and help you overcome the obstacles. It’s the same with investing—and it’s called diversification.

“Diversification can help your portfolio weather the market volatility many people want to avoid,” says Jennifer. “With a long-term portfolio, it’s not about focusing on that one stock. Instead, focus on your goals—all of them.”

Another trap is recency bias—or overemphasizing recent market activity. “If you’re just hearing about a hot investing trend on the news, you probably already missed the time to get in,” says Jennifer. “You have to think longer term.” She often tells clients to look at different time periods.

Still, Rowland says one of the biggest obstacles may be negative investing behaviors, such as market timing or trying to avoid risk completely. “While helping clients overcome these behaviors is one of the biggest challenges, it’s also the thing that may move the needle and help them the most.”

Understanding your values about money may help you overcome the obstacles in your way. We all have a history with money, whether from our parents or on our own, so it’s important to understand yourself. Talking to a financial professional is a good way to see where you may be able to avoid any sand traps along the way.

How Others Have Had Success With Long-Term Investing

Long-term investors make a choice. They decide to believe, then see, what it can do for them. Or maybe they were inspired by someone else and decided to go for it. Still others have learned from experiences—good and bad. And while past performance is no guarantee of future results, our financial consultants have seen the diligence and commitment of a long-term approach work.

Rowland tells about a client who received an investment gift from her father in 1990. “He told her to invest whatever she could monthly. She decided to put away $1,000 a month and did so faithfully.” If she was between jobs, she’d bartend so she wouldn’t miss a month. The goal was to use time in the market, compounding returns and additional contributions to build up her balance to where it is today.

Amy has a client who started an investment 40 years ago with $10,000. Over the years, she put in a sum here and there and never touched it. Not once, through all the market's ups and downs. Not once. “She started with smaller chunks and let it ride,” says Amy. “But it doesn’t have to be $10,000. People don’t think $25 a week can go anywhere, but they may be surprised how it can add up.”

For as many stories we have about clients who’ve succeeded as long-term investors, there are those who learned the hard way about having only a short-term approach. Many are results of market downturns that caused people to fear the swings. Many investors got scared during the financial crisis of 2008 and made snap decisions with their investments. That short-term perspective can often lead to bad decisions that can cost you in penalties, taxes and a smaller nest egg.

If you’re tempted to make decisions based on short-term market activity, our financial consultants say, call a professional first. You don’t have to be the person who looks back with regret.

“We’re here to help you make the best decision for your long-term and avoid knee-jerk reactions,” says Jennifer. “They can be a real cost to you in terms of your goals—five less vacations or more years until you can retire. A long-term approach can help you ride out bad markets. And it’s also what your plan is for—like a GPS for your finances. Investing can feel much scarier without the map.”