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"In risk assets, you make 80 percent of your money 20 percent of the time."

The next time you think it's a good idea to get in and out of the market based on some vague notion that you can predict ups and downs, remember that line, which came from investing great Jeff Gundlach during a presentation last week.

Smart investing is not complicated, but it can be terribly difficult. The single biggest reason why most investors fail is simple and widespread: Money flows in and out of assets at exactly the wrong time -- in just when things are expensive, and out just as they're cheap. One 2007 study found that mutual fund investors earned an actual annual return of 1.6% below their funds' stated performance from 1991 to 2004 due to buying high and selling low. Compounded over the course of a lifetime, that can literally be the difference between retirement and no retirement.

It happens over and over again. And it will keep happening in the future. Unless you understand Gundlach's advice, you'll probably fall for it as well.

Stocks outperform most assets over the long run. Most agree on that, and history is pretty clear on setting the record. Ideally -- and rationally -- anyone with more than 10 years to invest would buy stocks at good prices and forget about it. You know you're in the right asset for the long haul. So why fret and bother second-guessing, tweaking your portfolio between other assets?

Part of the reason investors second-guess stocks is due to how returns have been marketed. Started by academics and run with by Wall Street marketing geniuses, the concept investors have been told time and time again is that stocks return something like 7% to 9% a year over the long run -- better than any other asset class. And that's true. They have.

But that can be misinterpreted to imply that stocks return 7% to 9% every year. And folks, they emphatically do not. While the long-term average annual return works out to 7% to 9% a year, what happens in between is wild and chaotic. In fact, stocks spend more years down more than 20% or up more than 20% than they do within the 7% to 9% range. Here's how it breaks down since 1928:

Sources: Yahoo! Finance, author's calculations.

Even this chart hides how skewed returns are over time. I've shown before that there have been about 21,000 trading sessions between 1928 and today. During that time, the Dow went from 240 to 13,000, or an average annual growth rate of 5% (this doesn't include dividends). If you missed just 20 of the best days during that period, annual returns fall to 2.6%. In other words, half of the compounded gains took place during 0.09% of days. That's a more detailed version of Gundlach's wisdom.

Now, every time that stat is used, someone says, "Sure, but what if you missed the worst 20 days?" Indeed, if you missed the 20 worst trading days since 1928, average annual returns jump to over 7% (before dividends).

But what's interesting about those 20 worst days? Most happened at nearly the same time as the best 20 days -- 1933, 1982, 2002, and 2008. It's implausible to think anyone could have avoided the worst days and hit the best days without simply being lucky. It can literally mean in Monday, out Tuesday, back in Wednesday.

Most of us at The Motley Fool think that the best way to build wealth is to buy good companies at good prices and hold them for a long time. Staying invested, in other words. That could mean having to endure a few years -- sometimes several years -- of really bad performance. That's OK. It happens. It's a perfectly normal part of stocks' long-term superior performance, as counterintuitive as it seems. "Volatility scares enough people out of the market to generate superior returns for those who stay in," Wharton professor Jeremy Siegel said last year.

What we're not into is thinking we can time the market -- get in now, get out now, "I'm expecting a weak second quarter," that sort of stuff. The number of people who can do that consistently and profitably is a rounding error compared with the numbers who try it and end up burned. Most will end up missing out on the 20% of the time when 80% of the profits are made.

There is a place for bonds, cash, gold, and other assets, of course. If you're nearing retirement, or need to access your money at some point over the next decade, being 100% in stocks doesn't make sense. If you don't have an appetite for ups and downs (and many don't), don't even try stocks in the first place. And sometimes valuations make so little sense -- like 1999-2000 -- that selling stocks makes sense for long-term investors based on valuations (but not market timing).

But for most investors most of the time, the surest way to build wealth is to be invested, stay invested, and not get scared out because of temporary fears. Many will ignore or forget that advice. And most of them will end up poorer than if they had not. It's happened in the past, and it will happen in the future.

Check back every Tuesday and Friday for Morgan Housel's columns on finance and economics.

Fool contributor Morgan Housel doesn't own shares in any of the companies mentioned in this article. Follow him on Twitter @TMFHousel. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

Read/Post Comments (21) | Recommend This Article (113)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 27, 2012, at 6:43 PM, sikiliza wrote:

    See, the only problem with the whole assertion of staying invested through and through is that there are many people who danced right into the 2008 crisis and never quite recovered - Circuit City, Wachovia, Lehman, Bear Stearns (hat-tip to Kramer), CIT group, Borders, Countrywide - you know this list.

    Between 2008 and 2009 over 8,000 companies (public and private) were placed in administration, liquidation or receivership. There is no such thing as a sacrosanct corporation.

    Any investment - stock, bond, derivative, venture round, can fail. That is why we research and understand our investments and develop entry and exit criteria - when that criteria is met, we take action. We don't buy and hold right into bankruptcy.

    To be honest, I would rather miss a few basis points on an uptick than lose a bunch on a market collapse. When the market disintegrates, it does so fast and ruthlessly. All exits become too small and retail investors are usually the ones that get trampled on the way out.

    That said, I agree with the 80% of the returns 20% of the time. It can even be 95% of the returns 1% of the time if a black swan event occurs and like MIchael Burry or Kyle Bass or John Paulson, you are skeptical and continually educating yourself.

  • Report this Comment On April 27, 2012, at 7:18 PM, InvestWhatWorks wrote:


    I don't think Mr. Housel was suggesting to hold stocks no matter what. I think the article can be simply summed up with with three sentences:

    - Stay invested long-tern companies in good companies.

    - Stay away (in any time frame) from bad companies.

    - If you invest in a good company that turns bad, valuations get to extremely-high levels or your thesis for initially buying the company chances, get rid of it.

    Something like Circuit City was a bad company long before the crisis hit. Its bankruptcy in 2008 was inevitable (even if the great-recession didn't happen). Nobody should have been holding onto that that one (long-term, short-term, any-term).

  • Report this Comment On April 27, 2012, at 8:16 PM, duuude1 wrote:

    "Stocks outperform most assets over the long run. Most agree on that..."

    I don't think most agree with that - I keep running into people who only want to talk about gold - maybe they just know it bugs me. :)

    Or perhaps it is just during hard times like now that people find it difficult, as you point out Morgan, to hang in there and NOT sell, but even more important to double and triple down and pour as much of your cash into the equities market at exactly what feels like the worst time - now. Instead they buy gold! Gah!

    When Spain colonized the New World, they shipped back so much gold and silver that it debased their currency and their empire sunk, you could say sunk under the weight of gold and silver.

    Investing in profit-generating companies is so much better than investing in metals or other commodities (though I won't argue that really really good traders can probably make money in commodities - I suspect that it takes much more effort and time than I have available).

    I'm very excited, actually about this company, and the analogy to the Spanish Empire, and the flood of new gold into their system is scary (history repeats)...Planetary Resources which is backed by some serious heavyweights:

    Brief conceptual video:

    Presentation by founder and chairman of Planetary Resources:

    And company website:

    If only I could invest alongside Larry Page and Eric Schmidt and Charles this venture! I certainly would not want to be invested in gold when their technology eventually succeeds...

    Invest in people (companies) - not chunks of metal.


  • Report this Comment On April 27, 2012, at 8:55 PM, steamoil wrote:

    I agree completely about investing in people( companies),But humans have needs, habits,and all the quirks that make them human. They are also the backbone of all good profitable companies. In order to realize the spectrum of investing, precious metals (10%- 20%) of your investable holdings should have metal in it. Gold silver palladium, platinum and if space allows, copper.Really, copper. At least 5 tons for it to be worthwhile.

  • Report this Comment On April 28, 2012, at 12:17 AM, drillerjim101 wrote:

    Shrewd investing can be broken down to two powerful truths:

    Rule #1: Don't sweat the small stuff

    Rule #2: Always remember it's all small stuff.

    Invest in the best companies in the world. Then sit down and have a drink and enjoy what's left of your life. In 5 to 10 years you will realize how good life has been to you.

    Jim Fregia, DDS

  • Report this Comment On April 28, 2012, at 1:06 PM, TMFDarwood11 wrote:

    Good article.

    "Stay invested" is a great expression. I take it a bit farther than simply buying good companies.

    I say, "stay invested" in your future. That's what this is really all about. The component of that personal future that financial investing is all about is one's financial future, and it spans decades.

    That future is terribly imprecise. We do know that over long periods, good companies tend to perform well. We do know that in the short term all companies can get knocked by financial disasters.Some companies can experience severe difficulties. We do know that diversification helps to distribute these knocks. We also know that having cash to ride through rough patches is a good way to smooth things. We also know a lot about differing correlations.

    Being invested in my personal financial future meant that I had to get an education about that future. It meant avoiding "sure things" and avoiding emotional responses. It also meant shifting from short term to moderate term investing; I say "moderate" because I have concluded that "10 years" is not "long term." None of this is necessarily easy to do. If it was, there would be no need for the Motley Fool!

    I do think that "staying invested" does work and I state that from my very limited personal experience. I've managed to come out ahead following relatively simple guidelines such as "buy good companies," avoid the "sure thing," avoid the "popular thing" and avoid emotional responses, So, even with the most recent financial melt down, the tank in housing prices, and so on.I've still managed to come out ahead and by that I mean that my overall investments are ahead of what I put into them since before the "panic." I didn't plunge into gold, or overboard in real estate or treasuries or any of a number of other "sure things" at the time. Yet I do own some of all of these things. Even my "liquid" investments of stocks, bonds and cash are up.

    The story of my investments isn't about a string of 10-baggers, nor is it one of sad losses. It's about incremental and continuous improvement, and "staying invested."

  • Report this Comment On April 28, 2012, at 1:13 PM, rossirina wrote:

    Only superman that can time the market can afford to be out and in the market. The simple people should decide on an investment approach (strategy) considering various aspects including risks & asset allocation and STAY in the market in good and not so good days.

  • Report this Comment On April 28, 2012, at 3:38 PM, portefeuille wrote:


    #23) On May 02, 2009 at 6:06 AM, portefeuille (99.78) wrote:

    This "taking away days" discussion is really unnecessary.

    Let us assume you are invested 100% on Tuesdays and 0% all other days. Let us further assume that the value of the always-invested-portfolio can be well approximated by something like this

    a_always (t) = exp(b*t) (see the red line here).

    Now what would be the approximation for the only-on-Tuesdays portfolio?

    It would be

    a_Tuesdays (t) = exp(b*t/5).

    That's it.

    It does not matter which 80% of the days you miss as long as they are chosen randomly.


    from here ->

    that red line is here ->

  • Report this Comment On April 28, 2012, at 3:41 PM, portefeuille wrote:

    ... and please do not write an article about "a stock has to make 100% to make up for a 50% loss". Most readers should know that 1/2 * 2 is usually equal to 1 ...

  • Report this Comment On April 28, 2012, at 3:55 PM, portefeuille wrote:

    ... a more fruitful discussion might be one on the topic "How is it possible that the best 'caps game biopharma investor' (at least excluding zzlangerhans) and probably best 'long only, active caps game player' and manager of this 'virtual hedge fund' -> is currently 'followed' by only around 50 readers on twitter?", hehe ...

  • Report this Comment On April 28, 2012, at 4:49 PM, Vince1172 wrote:

    youre a good writer, morgan. keep it up.

  • Report this Comment On April 28, 2012, at 6:57 PM, roribr wrote:

    One thing I have always been concerned about with these long range claims of stocks centers around the handling of companies that no longer exist. Companies go bankrupt all the time. How were they handled in the averages? Major averages (Dow, SP100 etc) go through many changes when considered over decades. My suspicion is that the ones that go away are simply traded for new ones thus skewing overall claims.

  • Report this Comment On April 28, 2012, at 10:24 PM, neamakri wrote:

    I'm not as smart as the people above. However, my advice is to keep some cash in reserve for the next time bargain prices appear.

    For example, I own some (ARLP). It had been trading above $80 for awhile. On April 9th I bought some at $50.66 because I had some cash available. Gotta love volatility.

    By the way, I am all for dividends. In the case of (ARLP) I am earning 7.4% on my money.

  • Report this Comment On April 29, 2012, at 10:05 AM, snickerdoodle9 wrote:

    Stock market sell offs are one of my best friends of long term investing ! Why ? Because I pick up some great bargains ( high yield dividends ) as cheap as I can purchase them for . When the dividends pay out I reinvest them . In rallies or sell offs I use both to my advantage . I am not losing money by reinvesting my dividends ;-) .

  • Report this Comment On April 29, 2012, at 9:43 PM, jrnhkkdo wrote:

    I may have missed this, but I see no comments about this article mention anything about the use of stop/loss points, or trailing stop/loss points. The two are different, and I leave it to readers to study the difference. Stop/loss points are used to protect yourself from stocks that go south unexpectedly (due to weather, deaths, natural catastrophes, black swan events, or other "acts of God"). They are crucially important over the long term, short term, anytime. Different people use different thresholds, depending on your risk avoidance preferences. Also, the older I get, the lower my threshold has become. I have seen ranges used between 13% all the way up to 50%. The point is, stop/loss is an important part of an investing toolkit, and people who don't use them are adding a lot of risk to their portfolios.

  • Report this Comment On April 29, 2012, at 11:18 PM, snickerdoodle9 wrote:

    @jrnhkkdo Good point ! As a retired long term investor , I don't use stop/loss points . I have managed to stay in the game without any losses over the course stock market sell offs that we have witnesses over the past several months . I am very diversified in my holdings in 10 companies that pay shareholders ( high yield ) dividends ) to own them and 6 corporate bond /blue chip companies . I reinvest the dividends once they are payed out . It's holdings like these companies that provide protection from risk to me regardless of what the stock market does . As long as I don't need the income for living expenses,this is the way that I will continue to invest this way until Uncle Sam comes calling for his cut 7 years from now . Even then I will continue to reinvest the dividends as I am pulling the income .

  • Report this Comment On April 30, 2012, at 9:47 PM, CaptainWidget wrote:

    <<When Spain colonized the New World, they shipped back so much gold and silver that it debased their currency and their empire sunk, you could say sunk under the weight of gold and silver.>>

    Inflating a currency and debasing a currency are two dramatically different things.

    The spanish currency was INFLATED (as in more units of gold were available to buy the same amount of material goods, making the price of goods rise). This is bad.

    The monarchy then DEBASED the currency, using less metal per coin and declaring it of higher arbitrary value in an attempt to counteract the lower real exchange value of gold. This is worse.

    It was the 1-2 punch that killed their economy.Lower real values of gold combined with lower real values of the coins themselves led to the currency becoming a worthless medium of exchange. I still am not sure what that has to do with the modern economy though. Until someone finds a new world filled with easily plundered silver and gold, I think the increase in precious metals will continue at a steady rate.

  • Report this Comment On May 03, 2012, at 5:49 AM, duuude1 wrote:

    Hey Widget,

    Morgan's article was about staying invested in equities, even during tough times. I was agreeing with Morgan, and tongue-in-cheek jabbing at folks who keep talking about precious metals as a great investment.

    The connection I was making (poorly) between the Spanish Empire and Planetary Resources is that - the value of precious metals can be dramatically and catastrophically altered by new sources (like the New World aka Americas and... the NEW Worlds aka asteroids)

    I have no argument that metals have increased substantially in price over the past several years - and -um... so did home prices earlier in the decade. But we all know now that home prices were inflated - and that over long periods of time home prices barely keep up with inflation. So I believe long term value of precious metals similarly paces inflation but with more fluctuations (that fluel these manias short term like now).

    And I have no argument that if you really like precious metals, a small percentage of your total net worth could go into commodities - someone mentioned up to 20% which I would choke on - I would say it should be play money like maybe 5% max.

    One thing that I think would help investors tremendously is to have a cheatsheet showing the long-run inflation-adusted (and gross) returns of all equity classes. This would help to put short-term (decade-long) pops and drops into perspective.

    Of course, that will never extinguish that classic line of all bubble-promoters: "this time it's different"!!



  • Report this Comment On May 04, 2012, at 12:31 PM, mikedever wrote:

    Regarding missing the best days vs. the worst days, it is true that both best and worst tend to occur during the same periods of high market volatility (such as the recent financial crisis). But that doesn't mean it's not worth avoiding the losses. in fact, as I show in this chapter (figure 12), missing BOTH the best and worst days increases returns:

  • Report this Comment On May 08, 2012, at 8:24 PM, FlyingCircus wrote:

    MikeDever has it right. Once again a Fool writer trots out the same long-only tired cheerleading that has obscured the reality since 1998.

    From Mebane Faber, the author of "The Ivy Portfolio" and the source of mikedever's linked article above:

    “However, if you miss the best and worst days in every case your compound return is higher than buy and hold. “

    In. every. case.

    Simple, 8 to 10 month moving average timing system has a very strong chance of improving your future returns, at 1/3 the risk of "buy and hold".

  • Report this Comment On May 08, 2012, at 8:28 PM, FlyingCircus wrote:

    Correction - MD was right - Shwager did write the original study on that as MD quoted, and Faber used it in his studies.

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