Many wonder how long they need to invest their money.
Like many others in life, the answer is “it depends.” While no two circumstances are identical, understanding the behaviour of the investment markets can help you make an informed decision.
History also shows that the longer you invest, you increase your chances of making money and the lower the likelihood of losing it. The below chart looking at the historical returns (net of inflation) of portfolios made up of decreasing exposure to UK Bonds and increasing exposure to UK Equities illustrates this:
Market Performance in the Short Term
From my experience, the first 12 months of any new investment can be critical. When you put money into the stock market, its value changes, and we refer to this as ‘market volatility.’ As you can see from the above chart, if you invest £100,000, the value might fall to £66,000 or grow to £155,000 during the first year after accounting for inflation. I’m sure you would agree that this is a broad range.
Unexpected declines can jeopardise the plans of long-term investors. However, market downturns have occurred for nearly two centuries, where the only constant has been their unpredictability.
Invest, but do so knowing what could happen.
Based on our experience and the lessons of history, we have reached the following conclusions:
If you want short-term certainty, do not invest in the stock market.
Short-term uncertainty is inescapable if you invest in the stock market.
The more certainty you need, the longer you should invest.
We recommend that anybody with money to invest do so for at least five years. In most cases, this suggestion will be unduly cautious, and you’ll get satisfactory results sooner. However, if you have shorter-term plans and still want to invest in the stock markets, be aware that you may end up with less than you invested.
Restarting the clock after portfolio changes
I have observed that many new clients for whom we make substantial portfolio changes view the value of their portfolio at the time as if it was a new investment. They then use this value to judge how well their portfolio is faring from that point onward. While this is understandable, it can make good investment behaviour more difficult. While it is true that the portfolio value has declined, the value may still be “up” over the longer term. It is up to us to encourage you to keep the long-term in mind as much as possible.