The market is an investment apparatus that rises. Since 1942 which is the last 78 years (including 2019), the market (S&P 500) has been up 62 of those 78 years if you include dividends, which, of course you do. (Source: S&P 500 Historical Annual Returns.)

Even further, the average return for an up year was 19.3% and the average return for a down year was -12%. So, this magical apparatus not only wins 80% of the time, but when it wins it does so larger than when it loses.

(I know this is not what we read in financial media, but most of that medium is sophomoric.)

Losing money in the stock market long-term, at least in the past, has actually been hard. The biggest impact on returns is simply fear.

We tend to get fearful as stocks go down and sell at the bottom. We tend to get fearful of missing out as stocks go up and buy at the top. If either of those behaviors is curtailed, it can just be one of them, then in the last 78 years, yes, “losing” would have been difficult.

Morgan Housel writes it best in his essay “How to Do Long Term.”

He notes that the long run is just a collection of short runs we all have to endure, and the long term is more difficult to endure than most people imagine.

This is why the long-term is more lucrative than many people assume.

Everything worthwhile has a price, and the prices aren’t always obvious.

Saying “I’m in it for the long run” is a bit like standing at the base of Mt. Everest, pointing to the top, and saying, “That’s where I’m heading.” Well, that’s nice. Now comes the test.

So, rather than assuming long-term thinkers don’t have to deal with nonsense, the question becomes how can you endure a never-ending parade of nonsense.

It’s with this in mind that we introduce the following dossier.

This is some of the best information I have ever read in regards to investing. When we read it, we might feel like something’s wrong, or it’s miscalculated, but it isn’t. It’s shrewd, effective and methodical. And better yet, historically it has created greater wealth than a standard buy and hold strategy. This was inspired by an article entitled:
How Great Is Dollar Cost Averaging? You Don’t Know The Half of It

Consider the 15-year period from 2000-2014. The Vanguard S&P 500 fund earned a 4.1% compounded annual growth rate (CAGR).
During that same time period, the Vanguard Short-term Bond Index fund also returned a 4.1% compounded annual growth rate (CAGR).

But, that second investment had zero down years and the first investment had four down years.

Further, that stock investment had 7x the volatility.

Now, let’s say you must invest $1,000 a month for the full term:
Here are the two investments you can choose from: The same CAGR, one never had a down year and the other had several with extraordinary volatility.

Which do you choose?

It turns out:
If you chose the bond index, your $100,000 would be worth $228,294.
If you chose the stock index, your $100,000 would be worth $352,202.


Here’s what happened. While both investments over the long-term returned the same, a buying and holding strategy (as opposed to a one-time “buy and hold” strategy) allowed us to get in on some great prices.

You see, not all of the money that was invested in the stock fund averaged 4%. Some money went in after 2001 and 2002 and 2008 and 2011 when shares were extremely depressed and subsequently earned returns of +12%, +15% and +20% or more.

Josh Brown brought this article to my attention and he wrapped his own flavor around it, calling it, as only Josh could, “How to Make Volatility Your Bitch.” Crass, yes, but at least the point was clear.

Rather than buying a stock all at once, one variant of the information we just covered would be to buy a little bit at a time, but to make it systematic. No opinion, it’s a metronome. Pick a day, pick a frequency and do it.

Here is a mind blowing reality I found when poking around the numbers. First, in that period there were about 180 months. If we break $100,000 into 180 equal pieces we’re looking at about $560.

Now, if we took $100,000 and just bought the S&P 500 for those 15 years, we would have ended up with about $160,000. That’s it.

But, if we did the most extreme thing possible, and delayed investing a large amount but rather bought just $560 in the S&P 500 every month for 15 years (which would eventually total to $100,000), it turns out we would have been left with about $170,000. That’s more than the $160,000 we would have had by just plopping down the $100,000.

For those comfortable with numbers, you know that’s totally absurd. We delayed investing by 15-years. Further, if we assume we got the average 3% interest on our cash balances, which of course we would since the money would be sitting in a brokerage account, the portfolio turned into nearly $200,000.

Now, I don’t think delaying buying stocks for 15-years is exactly the goal here, and of course, that 15-year period had some oddities in it because 2000, 2001 and 2002 were down years, the point shouldn’t be lost.

The goal is not to buy and hold but rather to be actively buying and holding.

When the market drops, for those of us that are buying and holding, low returns on stocks keep prices depressed and allow us an extended opportunity to buy more shares that should eventually rise. This also gets back to one of CML Pro’s core philosophies: having the right mindset.

When the market tumbles, if we are buying and holding, our mindsets go from one of fear (which often leads to panic selling) to one of encouragement. We’re getting investments we want to own for less.

As always, we share our thoughts and our process, but we never give recommendations.