The Power of Active, Long-Term Investing

March 2025 | Download PDF

Save Today, Enjoy Tomorrow

Staying invested in equities over longer periods increases the likelihood of positive returns. Historically, our economy has grown on average 6% to 7% nominally per year, or doubling every 10 or 12 years, and the stock markets have closely reflected that growth.

As GDP Has Grown, So Has the Stock Market

U.S. GDP in 1968 was $909 billion. It is now $29.9 trillion, or more than 31 times greater. The Dow Jones Industrial Average was 841 and the S&P 500 was 90 in 1968. They are now 42,002 and 5,612, respectively.

The performance data quoted represents past performance. Past performance is no guarantee of future results. The index is unmanaged. Index performance is not Fund performance. Investors cannot invest directly in an index.

Long-Term Investors Have Had Better Chances of Positive Returns

An investor in a product that tracks the S&P 500 would have had a 69% chance of generating a positive return during any given quarter between 1926 and March 2025. Increasing the investment horizon to 10 years would have resulted in a 95% chance of a positive return. And investing over any 20- or 30-year period would have produced positive returns 100% of the time.

*Not Annualized.

Sources: Morningstar Direct, FactSet, Baron Capital.

Past performance is not indicative of future results. The index is unmanaged. Index performance is not Fund performance. Investors cannot invest directly in an index.

A Few Missed Days May Be Costly

Since we cannot predict when economic and market cycles start or end, there is no good time to time the market. Over the past five market cycles, missing the best five days would have resulted in a 38% lower value of a hypothetical $10,000 investment, and missing the best 10 days would have resulted in a 55.3% lower value. As big down days are often closely followed by big up days, those who panic and sell on the down days are likely to miss out on the ensuing up days.

Notes: The analysis is based on daily total returns of the S&P 500 Index for the period 8/12/1982 – 3/31/2025, which covers the past five complete market cycles of the index. Each market cycle is defined as a bull market followed by a bear market. Bull markets are measured as an increase of 20% or more after a trough from a decline of 20% or higher; vice-versa for bear markets. Past performance is not indicative of future results. The index is unmanaged. Index performance is not Fund performance. Investors cannot invest directly in an index.

Inflation and the Power of Compounding

The purchasing power of the dollar has fallen about 50% every 17 years over the past 55 years. Although inflation causes currencies to lose value over time, it has a positive impact on tangible assets, businesses, and economic growth. This means stocks are the best hedge against the devaluation of your money.

While the simple answer to combat inflation is to invest your money over the long term, the concept of compounding tells us why. When your savings earn returns (e.g., bank interest, dividends), compounding allows these returns to earn even more returns. Over time, this effect snowballs, and earnings grow at an increasingly fast rate. Given a small initial investment, in year one the amount you earn on your investments will not be a lot. However, in year 10…or 20…or 30… you will not believe the impact of the “power of compounding.”

Notes: U.S. Small Cap Equities are represented by the Ibbotson® U.S. Small Stock Index; U.S. Large Cap Equities are represented by the Ibbotson® U.S. Large Stock Index; Long-Term Corporate Bonds are represented by the Ibbotson® Long-Term Corporate Bond Index until 3/31/2022 (when the index was temporarily discontinued) and the ICE BofA 15+ Year US Corporate Index Total Return Index after 3/31/2022; U.S. Long-Term Gov’t Bonds are represented by the Ibbotson® U.S. Long-Term Government Bond Index (approximate bond maturity 21.5 years); U.S. 30-Day T-Bills are represented by the Ibbotson® U.S. 30-Day T-Bill Index; and the value of Cash (devalued by inflation) was calculated using the Ibbotson® U.S. Inflation Index. Past performance is not indicative of future results. The indexes are unmanaged. Index performance is not Fund performance. Investors cannot invest directly in an index.

If you earn 6.5% on an investment, which is the approximate historic annual growth rate of the U.S. economy and stock market (excluding dividends) for the past 60 years, the growth of your investment over a lifetime will be exponential. You will have nearly 7 times your initial amount in 30 years, more than 12 times in 40 years, and more than 23 times in 50 years!

Baron Capital Invests for the Long Term

Baron Capital purchases stocks of well-managed, competitively advantaged growth companies that we believe will increase in value in the years ahead. As growth managers, we believe a long-term investment horizon is key to achieving above-average performance. We have outperformed the economy and U.S. stock market over the long term because we seek to invest in businesses with the potential to grow at least 15% per year, at a time when we believe their share prices do not reflect those favorable prospects.

Our Top 10 Longest Held Stocks Have Produced Strong Gains

The potential benefits of our long-term approach can be demonstrated by the returns of the 10 longest currently held investments across Baron Funds. Our investments have generated significant gains for our investors, with half of our top 10 longest held stocks generating annualized returns over 15.0% since their initial purchase.

Notes: The performance data quoted represents past performance. Past performance is no guarantee of future results. Portfolio holdings are subject to change. Current and future portfolio holdings are subject to risk.