Is Time Really an Investor’s Ally?
Discover the power of patience, and how time
fuels investment growth.
FSG Wealth Advisors, LLC
We’ve all heard it. Some of the most famous financial minds in history have declared it. When it comes to investing, time is your ally. And while we all know how compounding can handsomely grow an investment portfolio over time, how many years does an investor need to commit to receive the potential rewards of patiently waiting?
“The stock market is a highly efficient mechanism for the transfer of wealth from the impatient to the patient.” — Warren Buffett
The Minimum Amount of Time
We’ve all heard it. Some of the most famous financial minds in history have declared it. When it comes to investing, time is your ally. And while we all know how compounding can handsomely grow an investment portfolio over time, how many years does an investor need to commit to receive the potential rewards of patiently waiting?
“The stock market is a highly efficient mechanism for the transfer of wealth from the impatient to the patient.” — Warren Buffett
15-Year, 20-Year, and 25-Year Periods of Time
When investors hold a 65/35 portfolio for 15 years, an interesting pattern emerges. Compared to 10-year periods with returns ranging from 15% to 2%, 15-year periods show returns around 14% to 5%. This means lower highs but also higher lows. As we extend the investment time horizon, the range between high and low returns narrows. For instance, a 20-year span typically sees returns from about 13% to 6%, while a 25-year span ranges from around 13% to 8%.
Past Performance Does Not the Future Predict
Historical returns do not guarantee similar returns in the future. Many financial services industry disclaimers will say: “Past performance is not indicative of future results.” But historical returns do provide some useful information. In our portfolio comprised of 65% in diversified stocks and 35% in high-quality bonds, there has never been a period of negative 10-year returns, nor has there been a 25-year period when the compound annual return was lower than about 8%.
So while the past does not predict the future, the chances of getting stuck with a return less than about 8% on a 65/35 diversified portfolio over a 25-year period of time are remote. Could it happen? Yes—though circumstances would need to be extreme to anticipate a negative or a very low return as a probability over a few decades. That trend would simply not reconcile with the historical growth of the American economy or of international developed economies.
Take Away
For patient investors, take comfort in the high degree of certainty that you’ll be rewarded with an admirable compound annual return. If you’re willing to invest for two and a half decades, consider 8% as the probable worst-case scenario for your 65/35 portfolio. And if you can earn 8% worst-case, that means you can double your money about every 9 years and expect to triple your money over a 25-year investing time horizon.
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