Paid With Pain

John Lim

INVESTING IS PRETTY simple. If you don’t need to touch your money for 10 years or so, a good chunk of it can be invested in a globally diversified basket of stocks, preferably using very low-cost index funds. The likelihood that your stock holdings will have lost money after a decade is quite low, and exceedingly low if your holding period is 15 years or longer. Moreover, your investment is likely to outperform all other asset classes, including bonds, cash, gold and commodities.

But while investing in stocks may sound simple, it’s far from easy. And that has nothing to do with your level of financial sophistication or stock-picking acumen. Amateurs and professionals alike struggle in this arena, even when the road to success is as simple as buying and holding index funds.

The recent collapse of Silicon Valley Bank and Signature Bank brings back painful memories of the Great Financial Crisis. Which bank will be the next domino to fall? Are we on the precipice of another catastrophic bear market, like that of 2007-09? Should I sell stocks now and wait for the dust to settle?

Personally, I don’t believe that recent bank failures presage another financial crisis, but I’m humble enough to realize that I simply don’t know. Nor do I have any idea if the stock market will soar or collapse in 2023, although the fact that no one is talking about the former raises its likelihood.

But here’s one thing I do know: Over the next five years or so, news of the past few weeks will be forgotten. Fear will ultimately give way to greed. And stock prices around the world will probably be higher, possibly much higher.

Call me a Pollyanna or a head-in-the-sand investor. Bears always sound smarter than bulls. But history is on the side of the bulls. It’s easy to forget what stocks represent—ownership in real companies that mostly earn profits and pay out dividends. People don’t go to work each day to fail. Most people work hard and want to win. In the end, that explains why stocks have provided generous returns to investors over the long run, about seven percentage points per year above inflation.

But it’s never easy. If stocks always went up, investing would be stress-free and everyone would become rich. But if it were truly that easy, future stock returns would—ironically—fall. After all, dividends have historically comprised roughly half the total return of stocks. As share prices rise, dividend yields fall, trimming future returns.

The fact that stocks occasionally fall hard and induce fear sows the seeds of a generous “equity risk premium,” the higher long-run return that stocks provide relative to bonds and cash. In short, the fear of losing money—leading some investors to sell and others to sit on the sidelines—is a primary source of the generous returns earned by patient and courageous stock investors.

So, it’s your choice. You can pull your money out of the stock market when the news is grim, being content with the lower volatility and lower returns afforded by bonds and cash. When the financial turmoil has passed, you can return to the stock market, albeit at much higher prices.

Or you can steel your resolve and pay the price of admission that the stock market exacts. That price is not monetary—in fact, when fear is greatest, stocks go on sale. Rather, the price is emotional. You must learn to stay the course or even buy more when every nerve in your body resists. When all you see are paper losses and all you hear are cries of financial Armageddon, you must force yourself to look beyond the carnage and quietly whisper, “This too shall pass.”

History is clear. Common stocks are the surest path to long-term wealth. But don’t fool yourself: It’s never easy.

John Lim is a physician and author of “How to Raise Your Child’s Financial IQ,” which is available as both a free PDF and a Kindle edition. Check out John’s earlier articles.

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