Being a true long-term investor is one of the biggest edges you can have when investing.
Whether they admit it or not, most investors are “investing” for the next quarter or two. The trick is we must use this to our advantage, and this requires a necessity to expand our time horizon. Long-term returns are only relevant if we invest for the long term.
Studies of human behavior repeatedly point to the inability of investors to stay the course through tough times. Sock markets around the world had a harrowing year in 2008, but in October of that year Warren Buffett publicly made a prescient market call, reminding us to be greedy when others were fearful. In Australia Richard Coppleson in his sought after The Coppo Report, loudly rang the bell during Feb, March, April 2009 about how cheaply ASX listed shares were trading.
Most stock markets fell more than 50 percent during 2008 till Mar 2009 but many investors lacked a true long term investor's fortitude, and bailed out of the markets when the pain became too severe. An investor who panicked and only later re-entered the market would have found that his bank account at the end of the bet was a lot smaller than a hypothetical account in which he earned the index-fund returns for the whole period.
Alternatively the valuation declines many alternate and hedge funds experienced in the GFC crisis were less than half those of headline indices. As a result, hedge-fund investors stood a much better chance of staying the course and earning the returns on the rebound, even if those returns were less than those of an index fund over the next ten years.
Peter L. Bernstein is known for the quote "risk means we don’t know what will happen". Likewise a passive investment in a cap-weighted Index ETF isn’t a sure thing, and that uncertainty can create the rationale for portfolio diversification.
One parting thought...for those worried about the cost of managed funds, fees will always matter but market risk sometimes matters more.
