Lessons in Wealth: Keeping Faith in the Future
By Thomas Twombly

As we move into autumn I look forward to returning to the topics of personal and social wealth-building as foundations for leading a life of consequence. As a long-term planner, a father, a leader of a growing business that serves thoughtful investors, and as an advisor to both clients and other professional advisors, these subjects are far more interesting to me than the short-term vagaries of financial markets. Plus, the longer I live and work in this profession, the more convinced I become that for most people they are the crucial issues that put disciplined financial wealth-building activities into their proper context and perspective.

Nevertheless, with fears of a European crisis much on people’s minds recently, and with the attendant volatility of financial markets since July, it seems an appropriate time to focus some attention on long-term investing principles. Perhaps I can inspire a greater sense of purpose and perspective than what seems to prevail in the current headlines.

I turned 50 a few months ago, and this past weekend – September 10th to be exact – marked my 27th anniversary in this profession. In both cases I’m amazed at how quickly time has passed, and astounded at the growth and progress I have witnessed – despite the many stomach-churning events along the way. As I think about all that I have lived through, and all that I have helped clients and other advisors to steer through during my career, I’m reminded of two things:

(1) There have always been regular excuses to retreat into anxiety and fear as whatever crisis-of-the-moment has seized the headlines.

(2) Every one of those crises has proven ephemeral as the inimitable human drive to be, to do, and to create has eventually won out.

The future, I am quite confident, will be the same. It’s not different this time.

Since 1961, the year I was born, there have been a total of 12 “bear markets” – periods when the shares of great American and global companies have suffered declines of at least 20%. As I write this, with the S&P 500 down 16% since April, this recent decline doesn’t even qualify yet. During each of the 12 declines that have achieved that dubious status, the average peak-to-trough drop has been more than 30%. In other words, patient, disciplined, long term investors in high-quality companies have experienced painful, but ultimately temporary “losses” in their equity portfolios on average once  every four years during my lifetime.

Little wonder that equity investing creates such anxiety when viewed over relatively short periods.

Now for a far more powerful statistic: the S&P 500 reached its peak in December of 1961, the beginning of the very first bear market of my lifetime, at 72.6. Ponder that for a moment, and consider this: as I write today, 12 intervening “this time it’s different” scenarios later, the S&P 500 now hovers somewhere around 1150 – almost 16 times its 1961 value. Importantly, this doesn’t include reinvested dividends, which have enriched disciplined owners of those companies even more over that timeframe.

In other words, an equity investor who simply kept the faith throughout all the crises of my lifetime, had the patience to keep focused on their longest term objectives, and had the discipline not to capitulate to the fear of the moment, experienced an accretion of wealth that no other asset class can match.

Viewed over multi-decade or multi-generational periods, the undeniable lesson to be learned here is that the biggest risk of the great companies of America and the world has lain in not owning them – or in getting panicked out of them in the middle of one of those temporary declines.

This segues to an important point. Most people, left to their own devices, fail to acknowledge just how long their investing time frames are. They don’t think about how long their money needs to last, and they’re led astray from their most cherished lifetime goals by an overly short-term focus. They engage in behavior that might appear conservative in the short run, but which is actually terribly corrosive to their wealth, their independence, and their dignity over the long run.

According to actuarial statistics, a 62 year-old non-smoking couple retiring today stands a better than even chance that one of them will live to the age of 90. That’s almost three decades for which they need to plan and invest – against an environment where everything they will need to buy to support their standard of living will get more expensive every year. For someone like me, it’s more like four decades. And if you are someone who aspires, as many of our clients do, to have a meaningful impact on the lives of future generations of your family, it is longer still.

This may sound daunting, but it’s also empowering once you grasp it, because equities as an asset class, employed in disciplined, broadly diversified portfolios, are the only vehicles that have provided total returns – growth plus reinvested dividends – that have consistently outpaced taxes and cost of living increases over every 30 year period measured. Cash hasn’t done it. Gold hasn’t done it. Bonds haven’t done it, and at rates that are currently near their all-time historical lows, it’s highly unlikely they’ll provide any such protection in the future. If we truly aspire to build, preserve, and pass on financial wealth to others we love, we must embrace the inherent short-term volatility that owning great companies has always involved, and move forward with courage and long-term discipline. We must invest with a view towards 2021, 2031, or 2041 – not 2012.

Every investor should have sufficient cash available to cover near-term expenses and to be prepared for the possibility of an emergency without having to liquidate long-term holdings. Likewise, many investors should own bonds and fixed income to provide diversity, relative stability, and a cushion against the possibility that other components of the portfolio will behave negatively in the intermediate term.

But given the compelling evidence of the historical record, every investor with the appropriate long-term perspective should also own a diverse portfolio of equities – the shares of great American and global businesses – to capitalize on the overwhelming probability that the economy and financial markets will recover from this crisis, as they have recovered from all the others, and go on to experience entirely new levels of wealth creation in the future.

We live it what is still the most dynamic and innovative society in the world. Services, products, and technological marvels that we take for granted today were unimaginable 10, 20, or 30 years ago. The future will likely be the same, and patient, disciplined investors will benefit.

Keep the faith.

Author's Note: For more than 20 years I have read the work of Nick Murray -- author of five books in my personal library, newsletter writer, contributor to various financial publications, and professional mentor to financial advisors around the globe. His influence on my thinking and communication style during that time frame has been significant. Over those two decades I have incorporated into my own thoughts and beliefs - ideas, phraseology, and story concepts drawn from his original body of work. This essay, in particular, reflects that influence, and I want to offer proper recognition. tgt