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How does my time frame improve my chances of investment success?

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Mark Brighouse, Chief Investment Strategist

Mark Brighouse
Chief Investment Strategist | Email Mark »

19 August, 2021

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 The S&P 500 Index recently reached a milestone, having now doubled since the COVID trough on the 23rd of March 2020.  This was the fastest bull-market rally since World War 2. After such a rapid rise in markets, what level of returns can we expect going forward?  History would suggest that we can’t accurately predict short-term returns or time the market. On a one-year view, a negative market return is just as likely as a double-digit return. However, if we take a longer-term view, the odds of a solid investment return improve, with a corresponding decrease in the chance of a loss. Rather than trying to predict short-term moves, we think investors should ensure they are in the appropriate investment strategy for their time horizon and not get distracted by short-term volatility.

 

Everyone knows that sharemarkets can be volatile over the short term. The uncertainties created by an economy that can’t be easily forecast (even by the best experts), through to a virus that keeps mutating, mean that the range of possible returns over the next year is very wide.

History tells us that global shares have about a one-in-four chance of a negative return in any given year. This is based on 49 years of data on the MSCI World Index in NZ dollar terms. Another quarter of the years produced single digit returns and in half of the years, investors enjoyed double digit returns.

Things get interesting when you move beyond individual years and look at longer periods. Over a five-year period, we see the odds of a negative return come down and the odds of a positive annual return rise.

When an investor extends their time horizon out even further to ten years, the chances of a negative return really start to shrink (to around 10%). Single-digit returns rise further to about 45% of the periods. The proportion of double-digit returns only drops slightly at these longer timeframes, with 45% of ten-year periods seeing double-digit returns (which would mean two and a half times your original investment after ten-years).

Long term investors benefit from the ever-improving chances of a solid return and decreasing chance of a loss as time goes by. They make sure that they are in the appropriate investment strategy for their time horizon and don’t get distracted by the volatility in the short term. If you wish to check that your portfolio is right for your circumstances, talk to one of our team.

 Why Time Frame Matters


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