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Do you know your time horizon?
It typically takes time and patience for investing to help you build wealth. The amount of time you plan to invest before you need to cash in on your investment, whether for a house or retirement or something else, is your time horizon. It’s important to understand your investments and manage your portfolio with the right time horizon in mind.
The chart below shows how time horizons have affected returns over the history of the stock market. Spoiler alert: Longer time horizons lead to bigger investment gains.
Steadier returns are likely over longer time horizons
On an annual basis, the stock market has returned an average of 9% and has fallen as much as 49%, which occurred during the financial crisis in 2008. Clearly, it’s hard to count on stock market gains over short periods.
Stock market returns become much steadier over longer time periods. The returns over five- and ten-year periods are exponentially larger than returns over one-year period, while the biggest losses stay fairly steady across those periods.
Chart 1: Stock market returns increase with longer time horizons (rolling 1-year, 5-year, and 10-year periods since World War II)
Patient investors grow their wealth steadily
Focusing on the appropriate time horizon is an important step in managing wealth. Just look at the difference in returns between investing for a year and investing for 10 years in the chart above. Investing for 10 years would give you more than 10 times the rewards (with slightly less risk of loss!) compared to investing for only one year. This is why starting your investment journey as soon as possible, even by investing a little bit of money at a time, can really pay off in the long run.