Understanding the benefits of long-term investing

Financial market sell-offs can be alarming, shaking our confidence and triggering that most basic of human emotions: fear. Experience has taught us that taking a diversified and long-term approach to investing, combined with discipline, pays off when it comes to short-term market turbulence. The old stock market adage holds true today as ever: “It’s not about timing the market, but time in the market.”

Timing the market is not just complicated, it is also costly. History shows that the strongest market rallies often happen during periods of turmoil, when investor sentiment is at its lowest. Interestingly, some of the biggest daily gains in equity markets often occur during periods of heightened volatility. Take 9 April 2025, for example. It was the tenth-best day ever for the S&P 500 (Standard & Poor’s benchmark index of the 500 largest listed US companies). Notably eight of the 10 days with the biggest gains occurred during extended market downturns, underscoring how easy it is to miss crucial recovery moments when attempting to time the market.

Missing the best 30 market days can cost you more than half of your potential gains over the long run.Market drawdowns are nothing new. The average intra-year drop in the S&P 500 during such periods has been 13.8% over its history. But history shows that in the long run, drawdowns are often more than offset by subsequent rebounds. The annualised return for the S&P 500 over the period from 1990 to 2024 was 10.6%. Sitting out a crisis enables investors to avoid risk of permanent loss, while giving them exposure to the rebound. Investors who held on through the dips were rewarded – those who exited often missed the rebound. Investors who missed as little as the 10 best market days in the last 30 years may have seen their total return (in US dollars) more than halved.

Innovation often springs from crisis

Crises can act as catalysts for innovation, creating value. History also tells us that moments of crisis have often planted the seeds for long-term growth. The oil crisis of the 1970s spurred energy efficiency and diversification. The speculation-fuelled dot-com bubble of the late 1990s and early 2000s eventually burst, but the period marked the beginning of the Internet Age. The Covid-19 pandemic caused a global economic downturn but accelerated a structural change shaped by digitalisation, remote work and e-commerce. Innovation does not pause during downturns – it accelerates. Long-term investing means being positioned to capture that future upside, rather than reacting to short-term noise.

This principle has been vividly illustrated in the performance of the S&P 500 over the decades. As shown in the graph, a USD 1 investment made in the S&P 500 in 1989 is worth over USD 25 today. This is not the result of perfect market timing but rather exponential compounding; it underscores the value of staying invested through good times and bad. By maintaining a long-term perspective, investors can harness the transformative power of innovation that often emerges from periods of crisis. Investors who miss the best 10 trading days, however, may see the absolute return more than halved.

The key to building a resilient portfolio lies in a well-structured strategic asset allocation (SAA). This involves setting target allocations across asset classes based on expected returns, risk tolerance, time horizon and investment objectives, and rebalancing the positions at regular intervals. By focusing on the long term, we can embed resilience into portfolios, while addressing shorter-term noise.

Choosing the right allocation

The mix between liquid and illiquid assets is an important decision in the SAA structure. A portion of a client’s portfolio should remain liquid to cushion against unplanned outcomes. Investors should always bear in mind the risk and illiquidity risk they are taking on and know their own liquidity requirements. Portfolios should also be reviewed regularly. Pictet analyses the investment landscape every year over a 10-year period to identify opportunities and risks. Strategic long-term allocations typically remain stable unless there is a fundamental shift in our expectations.

Currently, we are seeing a fundamental shift in the global investment landscape. The decades-long dominance of the US is facing growing pressure. This year, one of our convictions is that we are seeing a tectonic shift of the global economy. Under the existing world order, the US has offered economic stability, security guarantees and above-average returns in exchange for foreign capital. This system has come under increasing pressure since the beginning of the year as a result of political polarisation and financial uncertainty. This is eroding confidence in the world’s largest economy and its status as a safe haven. Foreign investors hold US assets equivalent to nearly 90% of US GDP. A shift in capital flows – or even just a partial repatriation – could have far-reaching implications for global markets.

Meanwhile, Germany’s new willingness to engage in fiscal spending is a potential game changer with spill-over to the rest Europe, where lending growth and easing monetary policy are supporting a broader structural revival. As a result, the composition of the MSCI World Index could shift over time from 72% US stocks today to approximately 62%, with European or Asian equities the main beneficiaries.

Performance of a USD 1 investment made in September 1989 (annualised return in %)

Swiss resilience

In this volatile environment, Swiss equities offer a relatively high degree of security, along with global reach and entrepreneurial innovation. The Swiss economy is resilient and ideally equipped to benefit from a possible economic recovery in Europe. Swiss companies are well-versed in adapting to challenges, enabling them to make the most of difficulties and helping them to prosper. Switzerland has long demonstrated an exceptional ability to maintain stability while fostering growth. Export-oriented companies are long accustomed to the consistently strong Swiss franc (CHF) and high labour costs. What’s more, the Swiss government provides very little in the way of subsidies for companies. In order to remain competitive, they must continuously reinvest and focus on innovation and globalisation.

This has translated into strong performance by Swiss equities that have generated an annual total return of 8% over the last 30 years. A long-term study by Pictet shows that no one that invested in Swiss equities and bonds for at least 14 years has lost money since 1926. This period of around 100 years includes the Second World War, the oil crises, the bursting of the dot-com bubble, the global financial crisis and the Covid-19 pandemic.

In the light of the low interest rate environment in Switzerland, we continue to focus on high-dividend equities, as the compound interest effect of reinvesting dividends continues to play an important role in generating long-term returns. A portfolio of Swiss equities with a dividend yield of 4% can achieve compound interest of over 22% over a period of five years, with additional income from price gains. Of course, the yield could be eroded by falling share prices, but the probability of Swiss share prices falling by more than 22% over a five-year period has historically been less than 10%.

Global uncertainty stemming from tariffs, geopolitical tensions, rising debt levels and other factors means there is a strong case for staying invested in CHF. In addition to Swiss resilience, balancing a portfolio through diversification is highly recommended. Extending the scope beyond traditional public debt and equity markets to include private equity and hedge fund investments can provide additional layers of diversification and mitigate portfolio volatility. By incorporating alternative assets, investors can achieve a more robust risk-adjusted return profile, positioning themselves to navigate complex economic landscapes effectively.

The key takeaway – navigating turbulence on the markets requires foresight and perseverance. Those who remain invested and have a long investment horizon can usually avoid losses. History has shown us time and again that the recovery will come sooner or later.