Time horizon is a key concept when constructing investment portfolios. The time horizon of one’s goals, which is the expected length of time before money is needed, plays an essential role in determining the appropriate risk level and investments within a portfolio.
Riskier assets, while expected to provide higher returns than safer assets in the long term, can experience a material pullback in any given year. Consequently, for short-term goals, like buying a car, safer investments are typically prudent. For longer-term goals, however, taking on risk can improve investment returns over time, but only to the extent an investor stays invested. Thus, having sufficient time to weather periods of potential volatility is important, as the probability of positive outcomes improves with time. As the chart illustrates, over one-year holding periods the S&P 500 has achieved a positive return nearly 80% of the time. After five years, the probability rises to above 90%, and by 12 years the probability of positive returns has been 100%.
An investor should understand their investment time horizon and tolerance for taking risk, maintain broad-based diversification, and ensure adequate cash reserves for near-term spending needs. These are all pillars of a well-designed investment plan and having them in place can also help an investor stay committed to a plan — even amid inevitable bouts of volatility. Time in the market and the power of compounding, what Einstein quipped is “the eighth wonder of the world,” are fundamental to growing an investment portfolio. In fact, even the worst investment timing is better than sitting on the sidelines, as we discuss in our accompanying piece.
Past performance does not guarantee future results. All investments include risk and have the potential for loss as well as gain.
Data sources for peer group comparisons, returns, and standard statistical data are provided by the sources referenced and are based on data obtained from recognized statistical services or other sources believed to be reliable. However, some or all of the information has not been verified prior to the analysis, and we do not make any representations as to its accuracy or completeness. Any analysis nonfactual in nature constitutes only current opinions, which are subject to change. Benchmarks or indices are included for information purposes only to reflect the current market environment; no index is a directly tradable investment. There may be instances when consultant opinions regarding any fundamental or quantitative analysis may not agree.
Plante Moran Financial Advisors (PMFA) publishes this update to convey general information about market conditions and not for the purpose of providing investment advice. Investment in any of the companies or sectors mentioned herein may not be appropriate for you. You should consult a representative from PMFA for investment advice regarding your own situation.
