Time is on Your Side
Just as compound interest can dramatically grow your wealth over time, the longer you invest in stocks, the better off you will be.
With time,
The Longer you invest, the Lower the Volatility of your Returns
The average annual return for the S&P 500 stock index for a single year has ranged from -39% to +61%, while averaging 13.2%.
After holding stocks for 5 years, average annualised returns have ranged from -4% to +30%, while averaging 11.9%.
If your holding period is 20 years, you never lost money, with 20-year returns ranging from +6.4% to +15%, with the average being 9.5%.
These returns easily surpass those you can get from any of the other major types of investments.
The Importance of having a Long-term Investment Horizon in Stocks
Again, as your holding period increases,
This is why it is important to have a long-term investment horizon when getting started in stocks.
Summary
While stocks make an attractive investment in the long run, stock returns are not guaranteed and tend to be volatile in the short term.
We do not recommend that you invest in stocks to achieve your short-term goals.
To be effective, you should invest in stocks only to meet long-term objectives that are at least 5 years away.
The longer you invest, the greater your chances of achieving the types of returns that make investing in stocks worthwhile.
Additional notes:
Though stocks typically perform best over the long term, there can be extended periods of poor performance.
For example, the DJIA peaked in 1966 and didn't surpass its old high again until 16 years later in 1982. But the following 20 years were great for stocks, with the Dow increasing more than tenfold (10x) by 2002.
Just as compound interest can dramatically grow your wealth over time, the longer you invest in stocks, the better off you will be.
With time,
- your chances of making money increases, and
- the volatility of your returns decreases.
The Longer you invest, the Lower the Volatility of your Returns
The average annual return for the S&P 500 stock index for a single year has ranged from -39% to +61%, while averaging 13.2%.
After holding stocks for 5 years, average annualised returns have ranged from -4% to +30%, while averaging 11.9%.
If your holding period is 20 years, you never lost money, with 20-year returns ranging from +6.4% to +15%, with the average being 9.5%.
These returns easily surpass those you can get from any of the other major types of investments.
The Importance of having a Long-term Investment Horizon in Stocks
Again, as your holding period increases,
- the expected return variation decreases, and
- the likelihood for a positive return increases.
This is why it is important to have a long-term investment horizon when getting started in stocks.
Summary
While stocks make an attractive investment in the long run, stock returns are not guaranteed and tend to be volatile in the short term.
We do not recommend that you invest in stocks to achieve your short-term goals.
To be effective, you should invest in stocks only to meet long-term objectives that are at least 5 years away.
The longer you invest, the greater your chances of achieving the types of returns that make investing in stocks worthwhile.
Additional notes:
Though stocks typically perform best over the long term, there can be extended periods of poor performance.
For example, the DJIA peaked in 1966 and didn't surpass its old high again until 16 years later in 1982. But the following 20 years were great for stocks, with the Dow increasing more than tenfold (10x) by 2002.
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