The Little Book of Main Street Money: 21 Simple Truths that Help Real People Make Real Money

Chapter 12. Short-Term Results Matter to Long-Term Investors

Keep One Eye on the Horizon—And the Other on the Ground Ahead

Whenever stocks take a beating, investors are advised to remain calm. "Stay the course," counsel the pundits. "If you've got a long time to invest, this sort of market craziness just doesn't matter."

That, however, isn't entirely true. Sure, you might have nerves of steel, so you aren't inclined to panic. Yes, rotten market returns should eventually be followed by stretches of good performance, as economic growth propels share prices higher.

But what happens in the short term is still hugely important to your long-run results.

Retiring to Monte Carlo

There are two issues here. First, truly terrible returns can have a devastating impact on investment compounding, thanks to the brutal math of investing. If you lose 10 percent, it takes an 11 percent gain to get back to even. Give up 20 percent and you're looking at a 25 percent rebound to recoup your losses. What if you lose 50 percent? To make yourself whole, you need a 100 percent gain.

All this is yet another reason to own a broad array of stocks, including some of the wild investments mentioned in the last chapter, and to hold at least some bonds. That won't stop you from losing money. But it should mute your losses and thus make it easier to recover. Indeed, to the extent you can smooth out your year-to-year returns and avoid big losses, your portfolio's compounding will become much more efficient.

To appreciate ...