Part of the reason is due to the phenomenon of loss aversion:

loss aversion refers to people’s tendency to prefer avoiding losses to acquiring equivalent gains: it is better to not lose $5 than to find $5.”

This means the pain of investment losses is far more powerful than the joy of equivalent investment gains. Despite the fact that the market goes up in most years, the possibility that it could go down in any given year is enough to scare many people away from investing.

If we only look at yearly stock returns, we can see just how volatile the market can be:


But if we take a slightly different view, we can see that most years the market goes up:

 

If you’re playing the short game, you might catch one of the down years. But if you play the long game, you’ll catch many more up years than down years.

Playing the Long Game

The best way to invest is to develop a long-term vision. Don’t worry about market returns over the coming weeks or months. Instead, focus on the coming decades.

Financial blogger J.D. Roth says,

…the best way to approach stock-market investing is to take the long view. Forget about what the market does today or tomorrow. Focus on the future.”

He also shares a wonderful chart from the book The Random Walk Guide to Investing:

Notice how volatile stock returns can be on a yearly basis. As you increase your investment horizon, though, volatility tends to decrease. The worst 25-year period for common stocks from 1950 to 2002 earned 7.94% annualized returns.

I’m Looking at 2048

I have no clue how the stock market will perform this week. Or this month. Or this year. Nobody does.

I do have a pretty good idea, however, of how it will perform over the next 30 years, which is all I care about. I expect stock prices to be significantly higher in 2048 than they are now, which is why a market crash or two over the coming decades doesn’t scare me.

Whether you’re a novice or a seasoned veteran, you can benefit from developing a long-term vision. When you’re focused on investment returns over the course of decades, you’re less likely to sell during downturns, less likely to time the market, and less likely to actively trade stocks in search of short-term gains.

This article was republished with permission from Four Pillar Freedom.