Long Term Investing - The Benefit Of Time

27th Sep by Joe Byrne

Long Term Investing - The Benefit Of Time

One of the benefits of being a long-term investor is that time is on your side! Long-term investors can skip over the short-term noise and just focus on achieving their long-term goals, (i.e. retirement savings). Short-term volatility is usually just a distraction.

When you have a long-term investment horizon, you can ride out the short-term volatility (i.e. the ups and downs of share-markets). Share-markets can be quite volatile over short periods such as months or even a few years but once you are able to invest through an investment cycle, which is typically around 7-8 years, the ‘UPS’ outweigh the ‘DOWNS’.

Recently, I have been asked by some of my clients and advisers something along these lines:

  • Are we heading into a market correct? 
  • Are things really overvalued? 
  • Should I sell some growth assets and buy some bonds, etc. etc.

I thought I would start by seeing what the actual experience has been.

History tells us that since World War II, there have been 14 times where the world’s largest share-market, (the S&P 500) had a loss of greater than 10%. That is 14 times over a 71- year period, or on average, once every 5 years.

Summary Findings:

S&P 500 – US Share-market

Findings

Period measured (1945-2016)

71-years

Number of market corrections >,= 10%

14

On Average >,= 10% correction every

5-years

Average loss over the 14 occurrences

(-24.50%)

Average recovery – next 12 months

+31.57%

Average recovery – next 36 months

+61.22%

 

Yes, Markets do correct but they also recover, and in a meaningful way.

Conclusions

History tells us that since WWII, there are large share-markets corrections every 5-years on average. History also tells us that the recoveries are strong and quick. Long-term invertors have the benefit of time and can ignore the short-term noise.

It is critical that you know what your investment horizon is. If you are planning to cash in part or all of your portfolio to buy a home soon, then you have a very short-term investment horizon and should not be invested in a long-term portfolio, (i.e. a growth portfolio).

My view is that if you have a long-term investment horizon, you have the luxury of not worrying about the short-term noise and volatility. It does not matter who the prime minister is, who the American president is, or which party is in power. What you do need to do, is stick to your investment or retirement plan.

If you are not sure what your investment horizon is or are planning on making a large purchase, then you should speak about this with your financial adviser, that is what they are there for.

Article by Joe Byrne, BA, AFA - Read More

Disclaimer: This article has been prepared for the purpose of providing general information, without taking into consideration any particular investor’s objectives, financial situation or needs.  Any opinions contained in it are held as at the report date and are subject to change without notice.  This document is solely for the use of the party to whom it is provided.

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