Have you ever watched a YouTube ad of a self-proclaimed guru, telling you that he can show you how to become super-rich, fast and easy, with little to no effort on your part?
I have. Like a million times. And I skipped them like a million times too, without hesitation.
But, Sometimes I hesitate.
In those rare instances that I hesitate to skip, all I do, as I listen to the guru, is ask myself “is there a person that will buy into what this fraud is selling?”
‘How stupid can people be?” I often wonder.
I believe that the surefire way to becoming wealthy is through long term investing, and my belief is rooted in historical facts.
Legendary Investor, Ray Dalio, the founder of the biggest hedge fund in the world once said that “there are few sure things in investing … that betas rise over time relative to cash is one of them”. In essence, he’s saying that stocks, bonds, real estate and other major asset classes will always rise over time.
Over the past 50 years, the S&P 500 has generated an average annualized return of 10.9% despite market crashes here and there. Investing an initial amount of $1,000 with regular monthly contributions of $1,000 for 50 years could be worth $14,829,823.73 at an annual rate of return of 10%.
The point is long term investing is great and has historically guaranteed wealth. But as a long term investor, I have come to realize that the bed of long term investing is not all laid in roses, there are some thorns here and there.
If you are interested in growing wealth and long term investing, and curious to know its downsides, here are some cons of investing for the long-term:
1. It requires lots of Patience
It’s easy to think, ‘if I invest $1,000 every month for 50 years and get an annualized average return of 10%, I will be worth over $10,000,000”. However, actually investing $1,000 month after month for years is f*cking hard.
That level of consistency; not too many people can pull off.
An OHIO study published last year revealed that humans are impatient, even down to seconds. The study seeks to understand the psychological mechanisms of waiting for a larger reward in contrast to instant gratification with a smaller reward.
The research team found that “people are impatient not only when thinking about whether to wait or not for a larger reward in abstract, but they are even more impatient when they actually must wait to receive a larger reward”. Their study also revealed that time feels longer when experiencing it, and the amount of reward is devalued when it is delayed.
We are wired to be impatient, to want it now. And I think this goes a long way to explain why people can be easily scammed by an internet guru who promises to show them how to become super-rich, fast and easy, with little to no effort on their part.
You can’t be a long-term investor without being disciplined and patient, and to become this, you’ve got to go against your human nature. And like I said earlier, it’s f*cking hard, however, not impossible.
2. The opportunity cost could be potentially massive
According to Andrea Caceres-Santamaria, a senior economic education specialist at the Federal Reserve Bank of St. Louis, “Opportunity cost is the value of the next-best alternative when a decision is made; it’s what is given up”.
What alternative investment could be potentially better than long-term investing?
Winning the Lottery, CONSISTENTLY.
That’s a joke.
I think every person has different investment opportunities open to them at any given time, and so, a general case cannot be made for everybody.
The early investors in Amazon put in around $50,000 apiece for a stake of a little less than 1% of the company at the time. And if they had held on to their entire stakes to date, their investment would have made them decabillionaires.
But not everybody had the opportunity to be an early investor in Amazon. As such, what might be considered a missed opportunity for someone else would not be for me.
However, going against my human nature to invest consistently for the long-term might see me miss out on, relatively, a massive short-term investment opportunities.
There are traders that have been able to make substantial profits in a very short amount of time over and over again, they’ve been able to create an effective strategy to raking in massive returns fast.
In 2011, Erik Finman bought $1,000 worth of bitcoin at the age of 12, when bitcoin was priced around $10-$12 and a few years later, at 18, he became a millionaire. Young Erik became a millionaire through a simple medium-term investment.
If programming yourself to invest for the long-term, will cost you the opportunity to make the millions you hope to make long-term through a short-term or medium-term investment, will you still want to invest for the long-term?
For most people, the answer is NO. Because we all want it fast.
There are a lot more disadvantages of long-term investing, like the time factor: the older you are, the less attractive the returns you could get from safe long-term investments. However, I will leave the comment section to spur more discussions on the cons of long-term investing.
Now, let’s hear from you in the comment section below.
Henry John is a Stock Portfolio Manager that focuses on companies developing cutting-edge technologies.
Keeping track of cutting-edge techs, companies and stocks is what I do almost everyday. And I love it. Whether it’s artificial intelligence, 5g, or autonomous vehicles; I’m all in.
I’m a self-made millionaire who made most of his money investing in technology companies while working in finance.
Yes! I owe it all to tech and finance.