Why Short-Term Returns Don't Matter

Why Short-Term Returns Don't Matter

April 08, 2024

In the fast-paced world of investing, it's easy to get caught up in the whirlwind of short-term fluctuations. Whether it's the sense of security of a bull market or the anxiety of a downturn, emotions can often cloud our judgment and lead us astray from our long-term goals.

One of the pitfalls of focusing too much on short-term performance is that it can lead to reactionary decision-making based on temporary trends or market noise. The recent returns of certain tech stocks may seem staggering, but when viewed in the context of longer-term performance, the picture becomes more nuanced. Understanding that short-term volatility is part of investing is crucial for maintaining a steady course through market turbulence.

Additionally, if an investor were to try and time the market, they may miss out one of the best market days of the year. The image below shows the difference between staying fully invested in the market vs missing the best 10, 20, or 30 days in the market. 

A key takeaway is the importance of putting short-term returns into perspective. While one-year returns may fluctuate wildly, the long-term trajectory tends to smooth out over time. This is evident in the rolling 30-year returns of the S&P 500, which show relatively stable performance despite fluctuations in shorter timeframes. By adopting a long-term mindset and focusing on the fundamentals of investing, investors can avoid being swayed by short-term noise and stay committed to their financial objectives.

Ultimately, successful investing requires patience, discipline, and a steadfast commitment to the long-term vision. While short-term volatility may test our resolve, it's important to remember that investment enlightenment comes from recognizing that the long run is the only horizon that truly matters. By staying the course, and weathering the inevitable ups and downs of the market, investors can position themselves for long-term success.