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The problem with long term investments
Hi, this is Mirko, a co-founder and now chairman of Datawrapper. This week we take a look at a problem relevant for everyone: How to successfully save and invest money.
A while ago an interesting line chart caught my eye. It compared the gains of different asset classes over time. The clear winner, at least at first sight, was the Standard & Poor’s 500 Index. Known by the short name S&P 500, the index tracks the stock performance of the 500 largest companies listed on stock exchanges in the United States.
If, in 1970, you invested $100 in a fund tracking the S&P index, then by 2023 the investment would have grown to $22,000, far more than it would have in other assets such as real estate or government and corporate bonds. Case closed, right? Put your money into an index fund and simply leave it there.
But it's not that simple; upon closer inspection there are two more aspects to consider. One is that the chart spans a really long period of time, 53 years from 1970 to 2023. Few people will be saving over such a long period, as most can only start putting money aside after the age of 30. For most people it is more realistic to invest from age 30 to 60, if at all. So this is where the line chart above is creating a slightly false promise: The data is correct, but the time span is unrealistically long.
The other key problem is not the market, but the emotions. Most individual investors are not trained and do not have a well defined strategy like big professional investors; they lack information and tend to change their strategy based on circumstance. They experience stress when their investments lose value in one of the stock market's recurring weak phases, which often results in a pattern of buying at high prices (when the market feels good) and selling at low ones. Psychology plays a big role. An investment in real estate, usually a family home, will often “perform” better for such investors, because the structure of paying down a mortgage over 20 or 30 years imposes discipline and consistency.
Will that ever change? One relatively simple option for individual investors is to reduce the role of psychology. For example: Team up with others into a small investment club. Members of the group can help each other reconsider decisions and stay on course when stocks lose value in a crisis. For all those who do not have that option, perhaps future AI systems could help, provided that they can be absolutely trusted to be fiercely on the users' side, not driven by hidden profit schemes.
That’s it for this week. One could easily write much, much more about such a relevant topic. But one lesson here is that even when the data is correct, we should always take time to inspect all aspects of a chart and evaluate its perspectives, in this example by considering the investment period. See you next week.
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