Awaken to Rip Van Winkle investing

Rip Van Winkle is a short story written in 1819 about a Dutch American who wandered off with his dog into New York State’s Catskill mountains to escape his wife’s scolding. There he met a group of dwarves who were playing ninepins. The dwarves offered Van Winkle some liquor, and after taking a few drinks, he fell asleep.

Twenty years later, he awoke to find that his beard had grown a foot long, his wife had died, his kids had grown up, and that he had completely missed the American Revolution.

Rip Van Winkle Investing

The Rip Van Winkle approach to investing, is an idea popularised by Warren Buffett. It suggests that people should buy investments of such high quality, that they could sleep for 20 years and awaken confident that their investments have flourished.

Buffett has long believed that if you can’t own a stock for ten years, you shouldn’t own it for ten minutes. He said, ‘Searching for the superstars offers us our only chance of real success. Charlie and I are simply not smart enough to get great results by adroitly buying and selling portions of far-from-great businesses. Nor do we think many others can achieve long term investment success by flitting from flower to flower’.

Buffett has utilised this approach, holding for decades companies such as American Express, Coca-Cola, See’s Candies, Dairy Queen and Geico.

ETFs

The Rip Van Winkle approach to investing aligns perfectly with owning broad based ETFs or well managed active funds.

In fact, if Rip had bought into the Australian market via a broad-based ETF 20 years ago, he would have done very well.

Let’s say that in September 2002, Rip had bought $100,000 worth of an ETF that tracked the S&P/ASX 200 Accumulation index (where all dividends are reinvested), today that same investment would be worth around $510,000.

The reason for this great result, is that when we combine great average returns with long periods of time, the power of compounding will produce extraordinary outcomes.

According to Vanguard, over the past 30 years Australian shares have returned on average 9% p.a. (including dividends). US shares have performed slightly better returning 10% p.a. over the same period.

Why Rip Van Winkle investing works

The reason why this style of investing works so well, is that ‘time in the market’ will always beat ‘timing the market’. And when people invest for the long-term, it helps take some of the emotion out of investing.

The kicker to holding investments for the long-term is that it also saves on costs. The continual buying and selling of stocks will attract brokerage fees and brings forward capital-gains tax.

A further advantage of Rip Van Winkle investing is that by investing for the long term, you won’t need to check your share prices daily.

Studies have shown that people who look at their portfolios daily, tend to trade more and thus accrue more costs. Also, looking at share prices daily can be stressful, especially in down markets.

Rip Van Winkle investing provides many benefits, but one of the best, is that it should give you a good night’s sleep.

The InvestSMART Diversified Portfolios are long-term investment accounts managed by our expert team. You select the Portfolio and let team and power of compounding do the rest. Use the chat in the bottom right to talk with the team today about our Portfolios.