The Biggest Mistake an Investor Can Make

May 2022

The market has gone up over time.

But not all the time; far from it.

And therein lies the challenge - you can’t have one (long-term gain) without the other (short-term pain).

Since 1990, the S&P 500 has returned an impressive 10% per year. And it’s done so despite two 50%+ bear markets (which is a fall greater than 20%).

Risk (or volatility) is clearly a feature in markets and the main reason why you can earn such great returns from holding stocks over the long run.

But when volatility rises and markets fall, that perspective can be lost. Panic sets in and with it comes the urge to sell. Acting on that urge can be disastrous for investors.

Why?

Because panic creates opportunity, and if you’re a long-term investor you want to be a buyer of these opportunities, not a seller.

When volatility is at its most extreme levels, the news is filled with nothing but negativity (war, recession, unemployment, bankruptcy, pandemic, etc.). During such times, investors tend to overreact, assuming that things will never get better again. This drives prices down and prospective long-term returns up.

Evidence shows, that every recession and bear market of the past was eventually followed by an economic expansion and new all-time high in the future. This time will be no different. 

The biggest mistake an investor can make is turning temporary volatility into a permanent loss. That loss is not just the realized one from selling during a market pullback but also, more importantly, the loss of opportunity to generate significant wealth in the future.

“The first rule of compounding is to never interrupt it unnecessarily.” – Charlie Munger

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