Client Question: How Important is WHEN I Start Investing to My Overall Investing Experience?

Not too long ago, a client came to me with an interesting idea for a blog. The client asked (paraphrasing), “how does WHEN I get started as an investor in stocks, affect my experience as an investor?”

We intuitively know it has some effect. Today’s younger investors (which I can count myself a part of) who started investing after the 2008 recession only know a stock market that goes up. Contrast that with someone who lived through the Great Depression, and we have two people with drastically different views on risk-taking.

We have monthly data for the S&P 500 going all the way back to 1871, so we can use this to get an idea of investors’ experiences in stocks at different times.

First, we will look at returns by decade. Inflation is included as well for added context.

I think most would find it surprising that the worst decade was actually not too long ago. If you started investing around 2000, you would have experienced back-to-back recessions in the next 8 years (dot-com bubble and Great Financial Crisis) in which stocks fell around 50% each time. Conversely, look at those stock returns in the 80s and 90s. Any investor starting their journey around then had the benefit of one of the greatest stock runs in history.

As you can see below, WHEN you start investing has an enormous effect on your wealth. The table below shows two investors’ ending wealth after investing $1 million for 10 years. One started in 1990, the other in 2000.

A difference of almost $4.5 million in ending wealth and it’s all from dumb luck. A poor investor in the 90’s did way better than a great investor the 2000s. Imagine how these drastically different results can influence your investing psyche going forward.

Obviously, when you happen to start investing is a major factor, but for HOW LONG you invest is the other important factor. The chart below shows rolling returns over 1-, 5-, 10-, and 20-year periods since 1872.

This is a busy chart, so I will take you through it. The first row of bars are 1-year returns starting from 1872 to 2020. The most obvious thing we can see is a lot of red, as well as much larger bars in both directions.

Important to note is how as we increase the holding period from 1 to 5 years and so on, the range of returns, and the chance of losing money diminishes. Looking at the last row (20 years), you will notice there is no red at all, meaning the U.S. stock market has never lost money over a 20-year period.

Ultimately, you reduce the negative effects of starting your investing career at a bad time by being a long-term investor. That being said, there are still some very unlucky long-term investors. The unluckiest making a 0.5% annual return over 20 years, while the luckiest made 13.2% annually. At the end of 20 years, the lucky investor would turn $1 million into nearly $12 million, while the unlucky investor ends with just over $1.1 million.

This is all part of the game. You cannot choose when you are born, or what future returns will be like when you start investing, but you must start. The best way to avoid the impact of bad starting luck is to diversify into other assets, such as foreign stocks, bonds, real estate, or other alternatives that can perform well while U.S. stocks struggle. This coupled with patience and discipline is the surest way to a large and healthy portfolio.