One decision investors often face is how to balance potential returns against the risks that may come with them. Beginners commonly ask whether long-term investing is really better than short-term trading, and what historical data can tell us. This article looks at the topic and offers a perspective on long-term investing for new investors.
Risk and Return: At the Heart of Investing
Before looking at specific assets, it helps to understand the basic relationship between risk and return, which is central to investing.
What Is CAGR?
Compound annual growth rate (CAGR) is the annualized rate of return that represents an investment’s compounded growth over a period. It assumes gains are reinvested in the calculation.
What Is Maximum Drawdown?
Maximum drawdown is a risk measure showing the largest percentage decline in an asset over a specified period, measured from a peak to a subsequent low.
A Broad Look at Different Assets
Once CAGR and maximum drawdown are understood, comparing asset returns and risks can help show how investments differ.
Comparing Returns and Risk Across Assets (Bitcoin, Nasdaq 100 and Other Indices)
Comparing assets can help investors see differences in historical risk and return. For example, Bitcoin may show a high CAGR alongside a large maximum drawdown, while the Nasdaq 100 may show a lower CAGR and less volatility. Other indices may have lower figures still. These comparisons depend on the dates, methodology and data used.
Time: A Variable That Can Change the Outcome
Looking only at return data can miss one of the most important dimensions of investing: time. The period for which an asset is held can substantially change the outcome.
How Time May Affect Risk (MSCI World)
The article’s MSCI World example says that the chance of a loss fell as the holding period became longer: risk remained over a one-year period, was said to become very small over two to three years, and the chance of a gain was described as nearly 100% over four years or more. These are historical claims that depend on the sample period and method; they do not predict future results.
Long-Term Data (S&P 500)
The article says that long-run S&P 500 data, with a history of nearly 100 years, show a similar pattern: a one-year holding period could still lose money, the chance of loss fell over five years or more, and it was described as close to zero over ten years or more. Historical results vary by start and end date and do not remove the possibility of future losses.
Case Study: The Japanese Stock Market
However, the idea that holding for longer always makes an investment safer is not universally true. Japan’s stock market experienced a period of economic stagnation in which a long holding period did not produce strong returns. This example highlights the importance of the fundamentals of the asset or country being considered.
Key Lessons and a Different Perspective on Investing
The article draws several lessons from these examples and suggests ways to think about investing:
Key Lessons
- Time may help reduce some investment risks, depending on the asset and period.
- Diversification can help reduce portfolio volatility, though it does not eliminate risk.
- Markets are not all alike; consider the fundamentals of the asset.
- Past performance does not guarantee future returns.
A Different Perspective: Time in the Market vs. Timing the Market
Trying to predict when to enter and exit markets (“timing the market”) is difficult and may require considerable expertise. For many investors, focusing on the amount of time invested (“time in the market”) may be a more suitable approach, depending on their goals and circumstances.
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