When It Comes to Investing, Time is on Your Side
On Tuesdays, we usually talk about time issues – time management, productivity and getting things done. But today, with the volatility of the stock market, we thought we’d take a look at how time affects your investments.
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It took many years to create a portfolio of value. It’s been frustrating to see that value fall so quickly. But we’re reminded of a Gordon Gekko quote from the movie Wall Street:
Yet that’s exactly what we tend to do. We get emotional and do the opposite of what we should do. We should buy low and sell high. We buy high on exuberance and sell low in a panic.
The smart money does just the opposite. It buys low in the panic and sells high on exuberance.
A look back at the Dow
We ran some calculations to see if there is a benefit to buying and holding for a period of time. We specifically looked at the Dow Jones Industrial Average because it’s the basket of stocks with the longest history.
Going all the way back to 1896, we assumed we bought the Dow on the last day of every year right before the close. We looked at every period up to December 31, 2007. Then we looked at holding periods of:
- 1 year
- 2 years
- 3 years
- 5 years
- 10 years
We looked at two specific things for each holding period: our return and our chance of losing money.
Risk and return results
We found that the longer we held the Dow stocks, the better our return with one exception – the average 3-year return was lower than the average 2-year return.
Even more interesting, we found that the longer we held, the less likely we were to lose money:
- In one year increments, we had a one in three chance of losing money.
- Over five year time frames, we had a one in four chance of a decline in the value.
- Of the ten year periods, we only lost money in one out of five cases.
Then we looked a little deeper – to the size of the volatility. The range of highs and lows went down over time, so the downside was as follows:
- About 14% for the 1-year increments
- About 2.75% if we invest over 5-years
- 0.55% for the 10-year ranges
So based on these historical numbers, the longer you hold your portfolio, the less likely you are to lose money and, if you do, the less you are likely to lose.
Just remember – the past doesn’t necessarily predict the future. However, it’s not unreasonable to use it as a guide.
Beyond the Dow
You’ll most likely invest in a bigger basket than the Dow. You’ll also probably want to invest in more than just U.S. stocks. You’ll also almost certainly invest in bonds and other assets. As a general rule, the more diversified you are, the more likely longer time periods will work in your favor – even beyond what we’ve shown here.
Here’s something we can’t possibly emphasize enough – no one will look after your money like you will. You are the Chief Investment Officer for you and your family. So it’s important to understand investing basics.
DIY doesn’t work
Having said that, do-it-yourself investing doesn’t work well for most of us. So plan to outsource and inspect. Your most critical decision, then, is the hiring decision. You’re not trying to figure out specific stocks to buy, how to allocate your assets among stocks, and those kinds of decisions.
Turning to professionals
With full knowledge of investing basics, you’re ready to work with a certified financial planner to help you plan your retirement portfolio. You’re also ready to invest in mutual funds with proven managers.
Time is money in the bank
As we saw with the Dow, time is money in your account. So keep investing – month after month or paycheck after paycheck. In times like these, you’ll get a sweet deal. The smart money is getting it too! You’re buying low so you can sell high later.
That puts time on your side!
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(Image by vuk011)