How to be a Long Term Investor, It’s Not Diversification

When you ask someone, are you a “long term investor”?  Almost everyone says, yes.  But that’s a meaningless interaction.  What is your definition of “long term”?  30 years? 5 years?  3 months? Markets don’t care about your time horizon.  But we all personalize our own time horizon… people think that they are OWED returns over a set time frame. They read “stocks go up on average 7% per year! Then say to themselves, If I invest for 10 years, I should have around a 70% return!” That thinking reveals more about people’s emotional relationship with money rather than their ability to handle risk, be a long-term investor, or how they’ll handle the uncertainty of asking themselves, “will I be OK”.  And that’s the real question people want answered, “will I be OK”, not are you a “long term investor”.  What’s emotional relationship with money do you prefer so that you will “feel OK”. Most people should answer, “I don’t know”.

The past 20 years of “investing”

If you’re like me and became an adult in the late 90s and early 2000’s, it was a brutal time to get acquainted with “markets”.  I entered college when the dot-com bubble burst in 1999-2000 and led to a crushing 50% decline spanning 2-years in the S&P 500.  So, if you have ALL your money in the US stock index, can you “stay invested” and be a “long term investor” all while seeing your assets shrink every day… over 2 years…. to half of what you had?!

From the peak of the US stock market in 2000 to the same date 10 years later in 2010… you lost money (based on share price)!  You might have broken even if you re-invested dividends, but is 10 years “long term” for you?  You were a good “long term investor” and expected a 70% return over 10 years and now there’s nothing to show for it?!

Think about the “boon of Globalization” in the late 90’s and early 2000’s when business schools and “consultants” were encouraging companies to move operations overseas (aka exploit foreign labor) via Globalization.  Emerging markets did incredibly well during that time period, with some nations (like Brazil) doing a quadrupling in stock price vs the US market which did nothing.

Well we all have recency bias, and because emerging markets have done SO WELL… we all shift money into emerging markets from 2010 till 2020… this is what people do (today it’s Tesla, technology, work from home, green energy, etc… which may continue for another decade, I don’t know). When people say, “time in the market is more important than timing the market”.  Sure, which “market”? This is something people said in 2010: “I’m moving from the S&P 500 index to MSCI world index… I’m still in the market.” Let’s see how that worked out.

During 2010 to 2020, emerging markets (i.e. international markets in general) did nothing… flat over 10 years.  The S&P 500 (US Stock Market) roared, nearly tripling.  Now let’s talk about the narratives & stories about why this happened.

Perhaps there’s only so much “cheap” labor that can be extracted through Globalization, and a “middle income” country has a tough lift becoming a “developed economy”.  It’s hard becoming a “developed economy” and providing healthcare, clean water, clean air, social fairness, etc.… all things that are happening in the USA right now so it’s hardly an easy problem to “solve”. The USA is a very wealthy country so how do you expect China to get over that hurdle?

Or MAYBE, because US corporations began investing / offshoring operations to emerging market nations (i.e. cheap labor), this caused a weak dollar (i.e. trade deficits / supplying too many dollars to other countries)… causing emerging markets to outperform and the whole narrative about labor exploitation is non-sense.

In 2009-2010, would you have been able to shift out of emerging markets which have roared, into US equities which had done nothing, all while reading articles like this written in 2009.  The professionals are saying, “we have a weak dollar and it’s here to stay!”

Getting back to the point… if you stayed in either the US stock market over those 20 years or emerging markets from 2000 till 2020, which was better? Who knows, what’s your time horizon? What stories do you listen to? People think “diversification” would have helped… that’s something we’re all supposed to do, right?


Let’s look at those 2 huge crashes that kept the S&P 500 (US stock market) down between 2000 & 2010, the dot com collapse and the Great Financial Recession. Can you stomach declines of 50%? What about if you are “diversified” and have a 60% stock / 40% bond portfolio to make it easier to stomach.  Those drawdowns are still 34%.  If you had $1,000,000 and suddenly you lose $340,000 when your portfolio was supposed to be “moderate” … how are you going to feel?  What about a 40% stock / 60% bond portfolio labeled “conservative” … but you still lost 20%. Diversification really cannot come from “markets” alone (i.e. the things brokers try to sell you… financial products, besides Nassim Taleb like ideas).

Being a long-term investor comes down to your emotional relationship with money, and calmly answering the question… “will I be OK”.  So, what’s the best way to stay invested?

The proper answer is “diversification”, but that’s not helpful because it doesn’t address the emotional relationship with money. “Diversification” is an admission we can’t see the future, and diversification will help a little by smoothing out the ride. But it’s a function of logic and math, not the emotions that keep us as “long term investors”. How many wonderful marriages/relationships are based only on logic? If you say you are “aggressive” and suffer a 50% loss, will that make you feel any different than if you call yourself “moderate” and suffer a 34% loss? Money is a relationship and like relationships, have their ups and downs… what’s your breaking point? What about when it’s all going great, will your fear of the good times ending creep into your mind?  I certainly know a lot of people like that.

The emotional side of long-term investing is better handled by staying invested with your values / higher self. What I mean by that is having the courage and faith to manifest what you value in the world.  This will not lead to hand holding and roses… this will be people who value freedom vs those who value collective comfort.  Let’s say there’s a group of people who value the freedom to not wear a mask and carry loaded firearms, more than another person’s perceived comfort from those unencumbered freedoms. Or people who protest systemic racism by breaking perceived symbols of that system, more than another person’s property rights within that system. They will certainly manifest their investment decisions in vastly different ways. So, game on.

Meaning is the instinct that orients one to proper action within the world. Having that grounding, whatever that instinct orients you to… within your investing, will keep you a long-term investor. It makes those ups and downs a lot easier to stomach.

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