As we mentioned in last week’s post, time horizon is the length of time you plan to hold an investment which usually lines up with some sort of event that will require the use of the funds invested. One of the most common of these so called liquidity events is retirement. The asset classes you invest in will depend upon your time horizon. Each asset class has different characteristics that make it more suitable for different types of scenarios and time horizons. Today I want to discuss the time horizon for investing in stocks.
It has been said many times that investing in the stock market is a long-term game. The day-to-day, week-to-week, month-to-month and year-to-year moves in the stock market can be maddening for anybody that doesn’t possess the proper perspective. Over long periods of time, the stock market has tended to move in an uptrend with periodic hiccups. It’s important to note, there have also been long periods of time where the stock market hasn’t made much progress but has remained stagnant. Trying to predict what will happen with the stock market in the future is a fool’s errand and I recommend not getting into the prediction business. The right approach is to gain an understanding of the odds we face and to get the odds in our favor, as famed investor Howard Marks likes to say.
Having a long time horizon is one of the ways to get the odds in your favor when investing in stocks. At its core, a long time horizon is synonymous with being patient. However, it’s not just about being patient. To have a long time horizon and to make decisions that reflect that long time horizon also require us to have certain information. Specifically, we need to have a basic understanding of how the stock market works over time. Don’t let this intimidate you. You don’t need to understand the inner workings or the day-to-day details. Put simply, you need to know two things. First, there is a LOT of noise in the stock market that results in a lot of ups and downs in prices. On any given day or in any given time period, stock prices can whip around pretty dramatically giving heartburn to even the most seasoned investors. Second, the stock market tends to move up over long periods of time. With these two pieces of information, we can arm ourselves with the necessary perspective to make decisions that are consistent with our respective time horizons, which is based upon of our individual goals and the timing of those goals.
So if you’re looking to invest for a shorter period of time, stocks may not be the best alternative.You may get lucky but you also may get really unlucky. Understanding the odds and getting them in your favor is the surest way to give yourself the best chance at succeeding in investing. For stocks, having a long time horizon is one of the ways to get the odds in your favor.