We’ve established that long-term investing is a strategy designed to deliver optimal returns over decades. However, as you’re about to learn, “long term” has a different meaning for everyone.
In the finance world, we refer to the length of time you intend to invest as your time horizon. And whatdetermines your personal time horizon is your unique financial goals.
Whether that’s funding your child’s education, your retirement, or a house, it’s these big life plans that indicate how long you have to invest. Keeping that in mind, it’s a good rule of thumb to remember that the longer you can stay invested, the better. There’s logic behind it:
Very few companies grow exponentially in a short period of time (and those that do can decline just as quickly). At the same time, many companies grow exponentially over a long period of time. That means we investors can increase our chances of returns by
1) Diversifying our risk by spreading our wealth across a number of opportunities
2) Holding onto the assets we own for as long as possible
Besides setting an exit date based on our big life plans, a few additional factors can be of influence.
When your intended exit date is close, any chances of a looming recession are worth considering. Market downturns are inevitable, but they’re no big deal when you have decades remaining in your time horizon. That’s because your assets are likely to recover from any loss in value over time. However, when you’re approaching your intended exit date, you don’t have room for your assets to recover over five to ten years. In such a case, it can make sense to adjust your intended exit date accordingly or shift to assets with a lower risk profile.
The answer to, how long should I invest for? is as long as possible, while remaining flexible to accommodate major shifts in your life.
Changing life conditions
Change is the one constant we can guarantee in life. There’s a chance that down the track, you may have faith that a business idea of your own has a higher likelihood of delivering the returns you’d like. Or, you might find that you have a third child on the way. The point is that your financial goals may well change over the years, which will inspire you to change your investment arrangements.
The answer to, how long should I invest for? is as long as possible, while remaining flexible to accommodate major shifts in your life. With that in mind, let’s move to our next question on the topic: When should I buy and sell stocks, bonds, and assets?
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