Imagine a hypothetical investment. Call it the Acme Fund.
Over time this fund has been positive 75 percent of the time. In years when it’s up, the average gain has been 21 percent. In years when it’s down, the average loss has been 10 percent.
There’s no reliable pattern to when those gains or losses occur. They show up at irregular times, often when investors least expect them.
Given that information, would you invest in the Acme fund?
Most people would. Occasional losses in exchange for strong long-term results feels like a reasonable tradeoff.
The Harder Part
The real challenge isn’t deciding to invest. It’s what happens after you’re invested.
When losses show up, would you be tempted to guess when they might get worse? Would you try to step aside during down periods, or would you remain invested and accept that volatility is part of the experience?
History suggests that over long periods of time, accepting this tradeoff has paid off. Investors who were able to tolerate the losses were compensated for it.
This isn’t just a thought experiment. According to Capital Group, since 1928 the stock market has been positive in roughly 73 percent of calendar years, with average gains of about 21 percent and average losses of about 10 percent in negative years.[1]
The Real Tradeoff
Investing has always involved tradeoffs. One of the most important ones is choosing discipline over the urge to constantly adjust or react.
That urge often feels responsible in the moment. It feels like taking control. But over time, frequent reactions can become one of the most expensive mistakes investors make.
The challenge isn’t understanding how markets work. It’s staying committed during uncomfortable periods to a strategy that made sense in the first place.
That’s the real tradeoff.
– Jonathan
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