The 10-Year Rule: Why Long-Term Investing Is Your Greatest Ally
Hello, Master. The topic, 'Why You Should Plan for an Investment Horizon of at Least 10 Years,' is a very important one. Many investment failures begin with the impatience to get rich quickly. Today, the three of us will dive deep into this subject.
Today's topic is 'long-term investing'! To be honest, Kurumi-chan prefers making a quick, devilish profit and getting out… but since it’s my Lord’s question, I must take it seriously!
But let's be real, isn't 10 years way too long? Life is short and there are so many things to enjoy! Isn't it just sad to tighten your belt now to be rich 10 years later? In an era of rapid change like this, who knows how the world will have changed in a decade!
But even I know what the real power of long-term investing is. It's all because of the magic of compounding!
Kurumi, you've hit the core point. The 'magic of compounding' is the most important reason for long-term investing. Even Einstein is said to have called it the 'eighth wonder of the world'.
Let me show you some data. Let's assume, Master, that you invest $500 every month. We'll set the average annual return at 8%.
- After 1 year: $6,000 principal + approx. $220 interest = Total $6,220
- After 10 years: $60,000 principal + approx. $31,300 interest = Total $91,300
- After 20 years: $120,000 principal + approx. $174,400 interest = Total $294,400
- After 30 years: $180,000 principal + approx. $573,000 interest = Total $753,000
Do you see what this data means? For the first 10 years, the interest is much smaller than the principal. That's why it can feel unrewarding.
But after the 20-year mark, the interest begins to surpass the principal, and from then on, an 'exponential growth' phase begins, like a snowball rolling downhill. If your goal is to 'get rich quick,' you'll leave the market before you get to experience this phase—the phase where the real money is made.
Mew's data illustrates the core concept. To this, I would like to add the perspective of 'risk'. Why do so many people fail with short-term investing? It is because they cannot overcome 'market volatility.'
In the short term, the stock market is a frenzied place that can go anywhere. It fluctuates by several percent in a single day. Based on historical data, the probability of losing money by investing in the S&P 500 for just one day is about 46%. It’s almost a coin toss.
But what happens when you extend the investment period?
- Invest for 1 year, and the probability of a loss drops to about 25%.
- Invest for 5 years, and it drops to about 11%.
- Invest for 10 years, and it drops to about 4%.
- And for an investment period of 15 years or more, there has never been a single instance of a principal loss in the entire history of the S&P 500.
What does this mean? It means time acts as an antidote that dilutes the poison of 'risk.' Short-term investing is akin to betting on the market's chaotic noise, whereas long-term investing is the act of investing in the powerful signal of capitalism's steady growth.
» See also: The Case for S&P 500 ETFs for Beginners
Ooh, listening to Mika-pi makes it sound so convincing! So you're saying we should just think of a short-term drop as a 'bargain sale' and get over it!
I remember the market crashed hard in 2022! Anyone who got scared and sold everything must have been kicking themselves when they missed the massive rebound in 2023. But those who held on tight, or even bought more, are probably laughing all the way to the bank now, right?
So in the end, long-term investing gives you the right to not be swayed by the market's temperamental mood swings! It gives you the guts to say, 'Whatever, it'll be up in 10 years anyway!'
Kurumi's metaphor is rather unsophisticated, but… the core point is correct. That is the 'serenity that time provides'.
Most investment failures occur because of the emotions of 'fear' and 'greed.' When the market plummets, people sell at the bottom in a panic. When the market overheats, they are blinded by greed and buy at the very top. This is human nature; it cannot be helped.
But the moment you set your investment horizon to '10 years or more,' you take a step back from this emotional vortex. You know that the daily ups and downs will not have a major impact on your life. A market crash becomes an 'opportunity to buy good companies at a discount.' During a bull run when everyone is euphoric, you can calmly observe and think, 'I am getting closer to my target return.'
If you try to get rich quickly, you become fixated on the market's short-term volatility and ultimately become a slave to your emotions, leading to poor decisions. But if you resolve to get rich 'slowly, but surely,' time becomes your most steadfast ally.
Let me summarize.
- To Maximize the Power of Compounding: The real returns from investing grow exponentially over time. To enjoy this 'snowball effect,' a period of at least 10 years is essential.
- To Reduce Market Volatility Risk: The longer the investment period, the overwhelmingly higher the probability that you will recover from temporary crashes and turn a profit. Time turns the 'poison' of short-term volatility into the 'medicine' of long-term growth.
- To Escape Psychological Traps: A long-term perspective of '10 years' frees investors from short-term market noise and emotional decision-making, preventing the mistakes of selling in fear and buying in greed.
The idea of 'getting rich quick' is similar to hoping to win the lottery. But the idea of 'getting rich by investing steadily for over 10 years' is like the wisdom of a farmer who harvests an abundant crop every year from a well-tended orchard.
Which path you take is your choice, Master, but I hope our discussion helps you make that choice.