It’s a marathon, not a sprint… If you’ve ever started your morning jog off a bit too fast and found yourself exhausted as a result, you’ll probably relate to this quote with real feeling. Likewise, investing in the stock market tends to follow the same principle. Keep reading to see examples of compounding in action and why a long-term, conservative investment approach wins the race in the end.
Why investing is a marathon, not a sprint
Marathon runners have to prepare and plan for the 26 gruelling miles ahead. Setting off at speed might offer a tantalising early lead, but the effort involved is not sustainable. Overenthusiastic pace setters are typically reeled in by those taking a slower, more conservative strategy.
Similarly, investors taking high levels of risk can make significant gains. Take too much risk and they too can end up pulling out, exhausted. That’s what investors buying into more speculative areas tend to end up doing, even if they do have a good initial streak. If you’re considering investing in crypto, individual company shares, or other higher-risk ventures, it often pays to do some extra research and consider the predicted payout over the long term - rather than rushing for quick solutions.
Even the best short-term traders risk running out of road. Instead, a diverse portfolio of investments and the compounding of modest, positive returns over the long term tend to ultimately win; passing and lapping the short-term speculator over time.
The ‘miracle’ of compounding
That’s largely thanks to the power of compounding – staying invested and earning returns on your returns – and avoiding being tempted to chase the highest short-term gains. The highest returns are difficult to find, and probably involve a fair amount of luck, so it’s very difficult to produce them consistently. Instead, aiming for pretty good returns, regularly and for a long period of time, can be a hugely effective investment strategy.
To take an example, if you earn a return of 7% a year on £10,000, this is what happens to your investment over time:
- 1 year - £10,700
- 5 years - £14,025
- 10 years - £19,671
- 20 years - £38,697
- 30 years - £76,122
In essence, compounding is a long-term investing approach, spreading risk over time and maximising potential returns. It offers a higher chance of success the longer you hold your stake in the stock market.
Slow and steady wins the race
Rather than go all-out in a short sprint, running your own race and generating lower, but more reliable returns for a long period is a surer way to financial freedom. But what sort of mentality does an investor need to grind out these sorts of returns year after year? Focus and consistency are the key attributes – and the sporting world offers another good analogy.
The big-hitting cricketers who hit sixes into the crowd often draw the most admiration, but it’s often the more conservative players that tend to accumulate the really big scores. Alastair Cooks’s 294 runs against India in 2011 (a modern era record for an Englishman) is a great example. His teammate and then captain Andrew Strauss recalled the key to the innings was: “Cook's ability to maintain concentration and play the same way throughout – he didn't really up the gears, he just kept batting in his usual non-fussy way."
Once you are out you can’t score any more runs, just as in investing if you lose all or most of your investment you can’t recover.
Cook wasn’t scintillating to watch. He didn’t take on difficult deliveries or go for many big shots, but he faced 545 balls in a calm, methodical manner and simply avoided getting out. Once you are out you can’t score any more runs, just as in investing if you lose all or most of your investment you can’t recover. My apologies, by the way, to non-cricket fans, but I hope you still get the point!
A conservative investing approach won’t capture much excitement or admiration in the short term, but it’s more often successful. Something like 70-80% of spread betters on financial markets lose money – because their bets are necessarily short term – but longer-term investing turns the odds in your favour.
There is no guarantee that history will repeat itself, and we can’t rely on past performance as a guide, but various studies on the US market have shown that the chance of losing money on the broad stock market over a ten-year period is around 10% and based on history it falls away to zero for a multi-decade period. The biggest thing you can do to increase your chances of investment success is to extend your time horizon.
Make the hurdles smaller
It’s fine to take a small or calculated gamble for some fun, but it tends to be best to have the bulk of your portfolio consistently jumping one-foot hurdles rather than attempting ten-footers and falling over. The hard bit of course is consistently getting modest yet decent returns. The stock market might average a return of about 7% a year over the very long term, but it tends to lurch around and jolt people off who don’t feel comfortable experiencing the full extent of the ups and downs – well the downs anyway.
That’s why blending your investment style with a diverse portfolio can make sense. Spreading your investments across different geographies and sectors of the economy will help to a degree, and a variety of assets more so. High-quality bonds can balance the risk of shares by benefiting from a slower than expected economy. Other assets such as infrastructure and property can diversify further and add a useful income stream to returns, plus other forms of portfolio protection can be employed for more cautious investors.
If you want a diversified portfolio and don’t know where to start, why not take a look at our multi-asset funds? They offer an expertly picked selection of investments and are tuned to a given return objective and level of risk:
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A marathon, not a sprint
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