In these days of international tension, political polarization and so-so economic growth, it’s easy to see a dystopian future for the U.S and its economy. I suspect that’s one reason for the popularity of such dark post-apocalyptic shows as “The Walking Dead” and “The Handmaid’s Tale.” They ping our deepest fears about tomorrow.
See, that’s the difference between many of us and the super-wealthy. Wildly successful investors believe in the future, and they are in the game for the long haul. The latest example: billionaire Warren Buffett’s confident assertion that the Dow will hit 1 million within the next hundred years, up from its current 22,000 level.
Is that just the musings of an eccentric 87-year-old? Nope. Buffett’s prediction is based on two time-tested concepts: the inherent greatness of America, and the relentless power of compound growth, which Albert Einstein supposedly called “the eighth wonder of the world.”
Buffett has always been bullish on the United States. He summarized that faith in a recent speech, saying, “Being short on America has been a loser’s game. I predict to you it will continue to be a loser’s game.” Hard to argue with that. One hundred years ago, the Dow was at 81. Despite two World Wars, several smaller wars, a depression, numerous recessions, and massive social transformations, the U.S. economy grew to be the world’s largest, and the Dow increased 300 times.
That’s a compound annual growth rate of 5.5%. To reach 1 million in 100 years, the Dow would only have to average 3.87% annual growth. That bit of math prompted investor and analyst Mario Gabelli to joke that Buffett was turning into a bear!
Of course, no one – certainly not Buffett – is suggesting the road to Dow One Million will be straight up and smooth. There will be more dips, drops and negative-return years.
But over time, the market is likely to show continued growth.
All of this serves as a reminder of a central truth of investing: It’s not about timing the market, it’s about time in the market. Investors who get onto the market with a well-crafted portfolio and stay in through all the ups and downs have a much better chance of achieving their goals than people who jump in and out of their investments based on the latest headlines or market dips and tumbles. A Vanguard study of more than 58,000 self-directed IRAs showed that investors who made material changes to their strategy even once in the five-year period from 2008 through 2012 took an 8%-plus hit to performance.
Yes, fear is a powerful driver of financial behavior. If you have trouble riding out the rough stretches of market road, consider working with a financial advisor. Research proves that a good advisor can boost an investor’s returns an average 3%, in no small part by coaching them through stressful times.
In the meantime, hold on to this bit of wisdom from Warren Buffett. Some 1,500 people have made Forbes’ list of the wealthiest Americans. Those folks made their money in many different ways from entrepreneurship to investing to real estate. “But one thing you don’t see in those 1,500 names; you don’t see any short sellers.”
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