Friday, May 11, 2007

Investment horizon

Studies have shown that it is quite pointless to time the market if you have a long investment horizon. Btw investment horizon is simply the time when you start putting your money into some stocks or other investments until the time when you sell or divest them.

For simplicity sake, we would just focus on investing in stock markets, and not so much of investing in one stock, or other asset classes.

From 1950 to 2000, if you invest in a stock index (e.g. the S&P500) and your investment horizon is only 1 yr, i.e. you buy in any particular year and sell 1 yr later, your returns can fluctuate from -50% to +25%.

This means that if you are damn bloody good at market timing and started investing in at the bottom of the cycle, (e.g. 1998 to 1999), then your return can be 25%, in 1 yr. And if you are damn suay, and started at the peak of the cycle (1996 b4 Asian Financial Crisis), your return can be as bad as -50%, whoa that's why so many pple get burnt by stocks huh.

Going by the same logic,
If you invest for 5 yrs, your returns fluctuate from -3% to +23%.
If you invest for 10 yrs, your returns fluctuate from +1% to +19%.
If you invest for 25 yrs, your returns fluctuate from +8% to +17%.
If you take the average of all these returns, it is roughly 10%.
In fact average return for S&P500 over an 80 yr period is 10%pa.

As you can see, the risk or volatility of return decrease when the time period gets longer. Even if you had invested at the peak in the stock markets, you will at least get 8%pa for the investment horizon of 25yrs.

Of course if you hold your investment even longer, return converges to 10% (don't ask me how long hor, beyond 25yrs is the realm of academia, and it doesn't really make much sense in on our 3min MTV cultured Earth).

The common man concept of investment is hold for 2-3mths, make a profit and run. I really don't know how to define this? Some call it trading, some call it speculation or gambling, some call themselves chartist whatever. In my humble opinion, if you do this 100 times, most likely you will lose money on 50 trades. If you are damn good, you lose money on 48 trades. But you can cut loss fast on the 48 losing trades while you let your profits run on your 52 winning trades. If you can do this, you can still be a Big Swinging Dick, and probably can earn 10mn with a capital of 10k in 3yrs. And you can start writing books and give talks on how you actually did it, and challenge Adam and Clement to see who has a better track record!

If you like to hold your investments for 2-3yrs, it is still not good enough. Bcos if you invest your money in a down mkt, then you will probably not see light and get very frustrated. Maybe a lot of pple that we know belong here bcos we started investing in 2000, the peak of the biggest bubble in the history of mankind where a few trillion dollars worth of wealth is lost in 1 yr. So if you lost some money here, don't be demoralized, what you lose is a fraction of a fraction of a fraction of a few trillion dollars. We are talking about wealth with 12 zeros here.

If you hold your investments for 10yrs, I would say you are getting close to be a true value investor. Esp if thoughts are given to which markets to buy, which specific stocks to buy. There is still a chance that you will earn only 1%pa for 10yrs, if you invested in the absolute peak of the mother of all stock market bubbles, then you are damn sway and I suggest you go seek enlightenment and become a monk and forget about making money. But by and large, most of us can earn around 8%-12% on our total portfolio after 10yrs bcos that's the return for stock markets in general.

So after all this crap, I guess the moral of the story here is,

1) Long investment horizon you have, go for buy-and-hold and you will earn a decent return over the invested period, hopefully at least 10yrs, the longer the better.

2) You can try to time the market and succeed, you will be able to retire in 3 yrs but chances of that happening is quite remote and you might as well construct an impressive 3mth investment track record then start doing $5000 courses to teach pple how to invest, that way you earn more, faster!
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