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At the moment, many investors are focused on which stocks to buy. But what is less talked about is the time horizon that an investor has for making their investment. The time invested can substantially affect the overall risk-return tradeoff of an investment portfolio. The Standard & Poor's 500 index returned 10% per year over the last decade, which would equate to 113% if held for one year, 146% if held two years, and so on. At ten years this 100% higher return becomes 26%. With a 20 year time frame this 100% difference in return becomes 8%. This blog will explore how investing over different time frames can affect your portfolio and help you determine what timeframe will work best for you. It will also explore some of the key moments in financial history that can possibly be correlated with time scale. The longer the time scale of an investment, the greater impact it has on an investor's overall risk-return tradeoff. This is true because of the power of compounding returns over many periods. Compounding returns means that the earnings generated by past returns are reinvested back into an investment portfolio to generate even more earnings, which are then reinvested again. Each time this process occurs your initial investment grows even larger and this growth is not subject to taxes each year as your salary would be. For this reason, a short time frame can have a substantially different impact on your portfolio than a long time frame. In fact, the time frame of an investment can be as important as the company you're invested in. One way to look at the relationship between time scale and risk is to use historical data. This can help an investor understand the relationship between time scale and risk over the long run. The table below shows three periods of data for the S&P 500 index. Data was taken from Value Line Investment Survey published in December, 2004. All returns are cumulative returns to June 30, 2004. For example if an investment was made at the beginning of 1993, at the end of one year you would have made approximately 27% on your investment. This is assuming no reinvestment of dividends and no additional money put into the portfolio during this period. At 15 years, investors who invested in 1993 would have had a return of approximately 512%. With a time frame of 15-years or more, you would need to invest approximately $12,600 (inflation adjusted) to make $100,000. However, if the same investment was held for one-year or less your net return would be around $60,000. The chart below shows the relationship bewteen 10 Year Rolling Returns and Time Scale. This chart shows that for any given time scale the 10 year rolling return is always equal to or above 12% (except for 8 years). This means that there's no way you're going to lose money over the long run if you hold it for at least ten years. cfa1e77820
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