Crackerjack Greenback Prudent Advice for a Prosperous Future

December 1, 2008

How Long is Long Term?

Filed under: Investing,Retirement Planning — Paul Williams @ Crackerjack Greenback @ 4:00 am

       Two good questions when we invest money are:

  1. How long until I know I’ll get a positive return?
  2. How long until I’ll get close to the average return?

       Since we can’t predict the future, the easiest way to answer these questions is to look at what happened in the past. Keep in mind we’re looking at the worst case scenarios for each of these questions.

How Are You Invested?

       Your investment returns and risk (volatility) greatly depend on your asset allocation. The more of your portfolio that’s invested in stocks, the higher your risk will be. Higher risk means it will take longer to know for certain you’ll have a positive return over any given time frame. It also means it will take longer to know for certain that you’ll get your required return over any given time frame.

       To answer these questions accurately, we have to look at the mix of stocks and bonds in your portfolio. Assuming you’re invested in a diversified portfolio, the answers to your questions are given below.

How Long Until I Know I’ll Get a Positive Return?

       Put another way, this question is: “What’s the minimum amount of time I need to be invested in a specific portfolio to be fairly certain I won’t get a negative return?”. Here are the answers based on historical investment results since 1927.

  • 0% in Stocks (100% in Bonds): 3 Years
  • 10% in Stocks: 5 Years
  • 20-50% in Stocks: 7 Years
  • 60-80% in Stocks: 10 Years
  • 90-100% in Stocks: 15 Years

       Again, these answers assume you’re using a diversified portfolio as defined in this post.

How Long Until I’ll Get Close to the Average Return?

       This question can also be posed as: “How long do I need to invest so I can be reasonably sure I’ll get a return somewhere close to the historical average?”. The first step to answering this question is to define “close to the historical average”. For the purposes of this article, we’ll define close to the historical average as 75% of the historical average. For example, if the historical average for a given portfolio is 10%, then we’d consider 7.5% as being “close to” that average. So what’s the minimum amount of time we would have to stay invested in order to get close to the average?

  • 0-10% in Stocks: 55 Years
  • 20% in Stocks: 50 Years
  • 30% in Stocks: 45 Years
  • 40% in Stocks: 35 Years
  • 50-100% in Stocks: 30 Years

       Now, it’s important to remember we’re looking at the worst case scenario in both of these analyses. In reality, we’re likely to experience better results than these worst case scenarios. Most of these worst case scenarios occurred during the Great Depression.

       Historically speaking, a 100% Stock portfolio only experienced single digit returns twice over any 30 year period. Both of those single digit periods were during the 30 year periods beginning in 1928 and 1929—the worst times in history to begin investing.

       These time periods are good to keep in mind especially when we’re experiencing difficult times (like right now). When it feels like your investments aren’t performing as they should, just remember that it can take many years before you can expect to get a positive or average return in the worst case scenario. In the future, we’ll look at actual distribution of returns so we can see just how unlikely it is that we’ll ever experience the worst case scenario.

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