It is easy to think about what’s happening in the stock market right now when it comes to investing. Many investment advisors are scaring people away from wanting to do anything with their savings other than leaving their money in cash. Other advisors say this a great time to invest in the stock market while we are in a slight downturn.
It’s not just about the stock market, however, it’s about your investment goals, your investment time horizon and most importantly, managing your expectations.
Trying to time the stock market can be counterproductive. Some investors try to pick the top and bottom of the market to maximise profits. More often than not these investors miss the rebound or downturn, then sit in cash far too long and end up worse off than if they just rode the waves of stock market movement.
Time and risk are inversely linked and usually the longer you invest, the higher the probability of achieving your investment goals. Shares can be volatile over a short time horizon and unless you have a crystal ball and can make good investment decisions each and every time, the reality is your best investment strategy is to take a long-term approach.
Having said this, not all money should be thought of as “Long-term”. For example, perhaps you are saving money to build an emergency fund; having those funds available within a short period of time with little risk to the principle amount being saved is far more key.
So what would characterize an investor as short-term, medium-term or long-term and even more importantly, how does that relate to risk, volatility in the stock market and potential rate of return?
A Short-term investor’s time horizon would be 0 – 3 years and they are typically looking for:
- Risk – no risk of losing their money.
- Volatility – very low risk that the value of their money will drop.
- Expected investment return – interest rate per year comparable to a savings account.
A Medium-term investor’s time horizon would be 4-6 years and they are typically looking for:
- Risk – low to medium with some possibility of losing a percentage of their capital.
- Volatility – medium; capital value could go up or down in a year.
- Expected investment return = 4-6% per year.
The Long-term investor’s time horizon would be 7 or more years and these investors are typically looking for:
- Risk – medium to high, experiencing the highs and lows of the market.
- Volatility – high; capital value could potentially go up or down by 10 – 15% in a year.
- Expected investment return = 8-8.5% per year [on average over 10+ years].
Overall, most of the benefits of long-term investing stem from a preparedness to take a long-term view as opposed to knee-jerk reactions to current market conditions. Set an investment plan, prepare to take the highs and lows that will occur in the market place, add monthly to your long-term investment plan and if history is any indication, you should make out just fine.
Article published in Bernews, February 16, 2016