With Thanksgiving around the corner, it's a good time to take a step back and think about everything we're thankful for this year. First and foremost, I'm overwhelmingly thankful for my ultra-supportive wife and our two healthy, beautiful children, and also for being able to get up every morning and do a job I love along with dozens of the best colleagues I could ever ask for.
I'm also an avid believer in the idea of long-term investing, as I imagine most of the people reading this are. With that in mind, here are five things I'm thankful for from a buy-and-hold investor's standpoint, and why you should be as well.
1. Compound returns
Everyone knows the story of someone's grandparents who have millions of dollars in investments even though they worked blue-collar jobs their entire lives. Or maybe you've heard the story about a janitor who ended up with a multimillion-dollar 401(k).
How did they do it? The most likely explanation is the magic of compound returns, which is the most powerful tool in a long-term investor's arsenal.
Here's a simplified explanation of how compound returns can turn small amounts into large amounts.
Over time, the stock market's annualized return is about 10%. If you have a $10,000 investment that earns 10% in a year, you'll have $11,000 at the end of your first year -– a gain of $1,000. The second year, you'll earn 10% of $11,000, or $1,100, bringing your total to $12,100. The third year, you'll earn 10% of $12,100, or $1,210. The fourth year...well, you get the idea. Each year your returns get larger and larger. Mathematicians refer to this phenomenon as "exponential growth."
Now, let's say that you hold this investment for the long haul. After 10 years, your original $10,000 investment could be worth $25,937. After 20 years, you'd have $67,275. After 30 years, you'd have $174,494. And finally, after 40 years, you'd be sitting on $452,593. And keep in mind, this assumes you made one $10,000 investment. Imagine if you had invested a few thousand more each year during that 40-year period.
2. Warren Buffett
Warren Buffett turned 88 years old in 2018, and all investors should be immensely thankful for the decades of timeless investment wisdom the Oracle of Omaha has given (and continues to give) us. It's impossible to list all of Buffett's best advice in this article, but here are a few of my favorites that are especially relevant given the recent market environment:
- "Opportunities come infrequently. When it rains gold, put out the bucket, not the thimble."
- "The most important quality for an investor is temperament, not intellect. You need a temperament that neither derives great pleasure from being with the crowd or against the crowd."
- "Successful investing takes time, discipline, and patience. No matter how great the talent or effort, some things just take time. You can't produce a baby in one month by getting nine women pregnant."
3. The war on fees
There's an unmistakable trend going on in the financial services industry: Fees are getting lower across the board. This is true for both investment funds and brokerage commissions.
Low-cost index funds continue to reduce their management fees as technological advances reduce overhead costs. You can now find S&P 500 ETFs with expense ratios as low as 0.03%, and Fidelity has introduced the first zero-fee index fund products to the market. This trend in lower fees has also put pricing pressure on actively managed funds, bringing most costs downward industrywide.
On the brokerage side, the emergence of new low- and no-cost stock trading platforms is changing the game. For example, the Robinhood platform is surging in popularity thanks to its zero-commission trading. To be fair, more traditional discount brokerages like TD Ameritrade and E*Trade offer far more features and conveniences. However, they've both had to lower their commissions significantly in order to remain competitive.
In other words, whether you're investing in individual stocks or index funds, and whether you're using a full-featured online brokerage or a no-frills one, chances are you're paying less to invest than you did just a few years ago. And, in even better news, there's no sign that this trend will reverse anytime soon.
4. Tax-advantaged investing
I don't know about you, but my tax bills over the past few years would have been significantly higher if it hadn't been for tax-advantaged investment accounts. As a self-employed individual, I've maxed out my allowed contribution to an individual 401(k), and have saved tens of thousands of dollars in taxes over the years.
You can contribute more than you might think to tax-advantaged accounts. Here's the 2019 contribution information investors need to know:
- Qualifying individuals can save as much as $6,000 in a traditional or Roth IRA, with an additional $1,000 allowed if you're 50 or older. While Roth IRA contributions aren't deductible, they can save you lots of money after you retire by providing a tax-free income stream.
- The 401(k) and other qualified retirement plan contribution limit has been increased to $19,000 for 2019, with an additional $6,000 catch-up allowance for savers 50 and older. Including employer contributions, the overall limit for contributions is $56,000 ($62,000 if 50 or older).
- If you're self-employed, you could save in an individual 401(k), SIMPLE IRA, or SEP-IRA. Each of these has a different method of determining your maximum contribution, so if you have self-employment income, check the information on each one individually to determine which is best for you.
5. Market volatility
Admittedly, this last one may sound a little weird. After all, the market had essentially been going straight up for a few years, and now that's no longer the case. Hear me out.
One of the most important principles to understand is that long-term investors love volatile stock markets, as they produce some of the best bargains. Take this personal example, the last time the stock market was this volatile was in early 2016, and that's when I was able to scoop up shares of Bank of America for just over $11, Goldman Sachs for about $150, and Apple for about $90. I've since sold my Goldman Sachs shares, but my Bank of America and Apple investments are up by approximately 150% and 115%, respectively, in about two and a half years.
Of course, nobody enjoys watching the value of their portfolio go down. However, from a long-term perspective, volatile periods don't tend to last very long, and when the dust settles, you'll be thankful that you kept a cool head and did some bargain hunting.