I grew up playing sports….Basketball, baseball, football, tennis….You name it, I played it. And as anyone who has played sports or has had kids who played sports or participated in cheer or ballet or dance knows….injuries are part of the game. It was inevitable that at some point each season I was going to sprain an ankle, pull a hamstring, jam a finger, get my bell rung, etc etc. If you wanted to participate in these activities you simply accepted the risk and the inevitability of getting hurt every now and then. You’d get dinged up and it would hurt like hell for a few minutes or a few days or maybe even a few weeks. Sometimes, rarely, it might even be something that took months or even a year to fully recover from. But eventually you’d heal up and keep on playing. The risk of injury was the price you paid to play the game. You never knew when it was coming or how bad it would hurt or how long it might take to recover, you just kept playing. Why? Because the benefits of the game far outweighed the price.
Athletics kept you in shape. They helped you make friends. They built character. They taught you about teamwork and accountability and responsibility. They brought joy and agony and celebrations and devastations. They taught you how to handle success and failure and how to manage your emotions. They built mental toughness. I didn’t recognize it in the moment but I was learning lifelong lessons that surely have helped me get to where I am today and will continue to help me throughout my life. Athletics taught me lessons that I’ll be able to pass down to my children. Generational dividends. And I cannot wait to introduce my daughter to athletics for all these very same reasons.
So why am I, as a financial advisor, writing about the costs and benefits of sports? Well, I think there are a lot of similarities between participating in athletics and being a long term investor. In athletics, the price of admission to the sport is the acceptance that there will be physical injuries and emotional disappointments that will hurt. Yet we accept that price because we feel the benefits outweigh the costs. After all, the pains and disappointments are almost always temporary. The lessons and toughness and friendships and memories last a lifetime.
In investing, we also have a price to pay. The periodic, unpredictable bouts of market volatility that cause our investment values to drop temporarily and cause us mental and emotional anguish are the price we must accept, and pay, in exchange for the lifelong benefits of compound returns on our investment. We accept the fact that the market is going to surprise us with moments of pain in exchange for the potential life changing asset appreciation that long term investing offers us.
It’s absolutely inevitable that we’re going to encounter setbacks along the way as long-term investors. Our investment portfolios are going to get sprained ankles and jammed thumbs and pulled hamstrings more times than we can count. But we heal up and keep on playing.
We’re going to have years where things just didn’t go our way and despite all of our preparation we end up with a losing record. But we show up again the next year and keep on playing.
Every now and then our portfolio is going to suffer a more significant injury that may take many months or even years to fully recover from. But recover, it always has. And come back stronger, it almost certainly will, as long as we keep playing.
We accept these inevitabilities because, like with athletics, the long term benefits far outweigh the temporary costs. Think about the last 25 years for the stock market.
In 99-00 we saw the technology bubble burst and cause markets to crash. Ruptured achilles. Multi-year recovery.
In 08-09 we endured the worst financial crisis since the Great Depression. Unemployment skyrocketed. Millions lost their homes. Investment portfolios were cut in half. Torn ACL. Multi-year recovery.
In 2018 the Federal Reserve began raising interest rates and caused a market panic that sent the stock market down 20% in a matter of weeks right before Christmas, erasing the gains for the year. Ouch. Sprained ankle. Losing record. Multi-month recovery.
In 2020 the world endured a pandemic that caused economies around the world to simply shut down almost overnight. The stock market dropped 30% in response. Ouch. Broken foot. Multi-month recovery.
In 2022 the market fell 25% as the Federal Reserve raised interest rates at unprecedented speeds to combat 9% inflation. Ouch. Broken arm. Losing record for the year. Still rehabbing, but almost fully healed.
And those were just the big setbacks. There were dozens of smaller aches and pains along the way. Countless jammed fingers and bruised thighs and pulled hamstrings. But if we just kept playing, the gains FAR outweighed the pains we endured. Hypothetically, $10,000 invested into the S&P 500 25 years ago would be worth $60,000 today. $100,000 would be $600,000. That is life changing. That is financial independence. That is generational wealth being created.
Did it hurt sometimes? Yep.
Was it worth it? ABSOLUTELY.
If we had chosen instead to avoid all of those temporary setbacks and not invest because we were too afraid of some temporary pain, we’d still be sitting on about $10,000 today. Adjusted for inflation, we would actually have far less today than we had to begin with. In fact our purchasing power would’ve been cut in half. So one could certainly argue that the pain of not investing FAR outweighed the pain of investing. In the end, the greater risk was not being invested at all. Avoiding the small bouts of pain was ultimately far more painful. The greater risk was actually in the avoidance of risk itself.
And this is how it has always been. Where do you think the phrase “no pain, no gain” comes from? Nothing that will dramatically improve our life comes free. Nothing. Everything that offers us meaningful long-term gain is going to have a price. In investing, the price of long-term financial independence is the inevitability of periodic setbacks to your portfolio. But history teaches us over and over again that these setbacks are temporary. Although past performance is no guarantee of future results, as long as we keep playing the game, we’ll likely come out on top. And if we play long enough, the game can change our lives. We just cant let the little nagging aches and pains along the way deter us from continuing to play. Not playing could end up being far more painful.
PS - You may wonder why so many of my posts and updates heavily focus on the potential for setbacks when investing. The answer is pretty simple. When the market is going up, everyone's a great investor. It's easy. Everyone's a genius. Where people really get themselves in trouble is during a down market. That's when it gets tough.
Making emotional decisions during a down market based in fear or panic can do irreparable damage to a portfolio. Selling a quality investment during a 30% drawdown turns what would have been a temporary ache into a permanent disability. My hope is that I can help you view market pullbacks as a feature of investing and not necessarily something that we need to try to avoid. As I said above, avoiding risk may be the biggest risk of all. If we accept that pullbacks are normal and won't destroy us and are simply the price we pay for potential future gains, we're far less likely to make a poor decision when they come along. If I can help my clients better tolerate volatility and avoid just ONE bad financial decision during their lives, I'll have delivered incalculable value. That is my goal.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual
All performance referenced is historical and is no guarantee of future results
All indices are unmanaged and may not be invested into directly.
Investing involves risk, including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments.
All examples are hypothetical and are for illustrative purposes.