The professional investor’s edge over you seems to tighten by the hour. Insider trading is rampant. High-frequency traders can see your trades before they’re even executed. US business network CNBC reported last week that Thompson Reuters sells the results of consumer confidence reports to select professional investors as little as half a second before the data is made public — that’s all they need to gain an edge.
“Why shouldn’t I just give up?” a reader emailed me last week.
I’ll tell you why.
Individual investors have a giant advantage over professional investors, and they might not even know it.
What is it? Time.
A month or a lifetime
You’re trying to fund your retirement over the next 20 years. Hedge fund managers have to woo their clients every month. You’re saving for your kids’ education next decade. Fund managers have to fret about the next quarter. You can look years down the road. Traders have to worry about the next ten milliseconds.
Most professional investors can’t focus on the long run even if they want to. As well-known former tech analyst Henry Blodget put it:
“If you talk to a lot of investment managers, the practical reality is they’re thinking about the next week, possibly the next month or quarter. There isn’t a time horizon; it’s how are you doing now, relative to your competitors. You really only have ninety days to be right, and if you’re wrong within ninety days, your clients begin to fire you.”
I’m a long-term investor. I’m not going to fire myself because of a bad quarter. The fact that you and I don’t have to play these insane short-term games is the last remaining edge we have over the pros. And frankly, it’s enormous.
The biggest risk investors face is losing money between now and whenever they’ll need it (retirement, school, etc.). The good news for you — and bad news for Wall Street — is that the odds of losing money drops precipitously the longer you’re invested for.
I took monthly US S&P 500 prices going back to 1871, adjusted them for inflation and dividends, and looked at returns based on various holding periods.
Holding stocks for less than a year amounts to little more than tossing a coin. You are almost as likely to lose as you are to win.
But the odds of success grow perfectly with time. If you hold for five, 10, 15 years or more, the odds of earning a positive return on stocks after inflation quickly approach 100%, historically.
The irony is that while the big firms and highly-paid traders have more information than you, its short time horizon forces it to deal with more randomness than you have to. That’s your edge. And it’s why someone who buys an index fund and forgets about it will beat the vast majority of professional money managers over time.
Hold stocks for a year and you’re at the mercy of the market’s madness — maybe a huge up year, or maybe a devastating loss. Five years, and you’re doing better. Ten years, and there’s a good chance you’ll be sitting on positive annual returns. Hold them for 20, 30, or 50 years, and there has never been a period in US history when stocks produced an average annual loss. In fact, the worst you’ve done over any 30-year period in US history is increased your money two-and-a-half fold after inflation.
The professionals would love to think about those numbers. Alas, it’s busy chasing its monthly benchmarks. You have the opportunity to focus on the long term. The question is, Will you?
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A version of this article, written by Morgan Housel, originally appeared on fool.com.