Time horizons: The longer, the better
Based on several well-known studies, the length of time that individual investors hold stocks, mutual funds and exchange-traded funds (ETFs) has shrunk precipitously over the past 50 years. Back then it was common for investors to have five-to-10-year time horizons, but today they are typically well less than a year, exacerbated by the proliferation of high-frequency/algorithmic trading firms. These firms are considered price-insensitive buyers and sellers—typically trading based on momentum and purely technical factors, with time horizons measured in nanoseconds. This is decidedly not a game individual investors should try to play.
In the chart below, you can see the power of long holding periods when it comes to minimizing downside risk. The longer you extend your time horizon, the less likely you'll experience a loss over that holding period. Longer time horizon = lower downside risk
Source: Schwab Center for Financial Research with data provided by Standard and Poor's. Every 1-, 3-, 5-, 10-, and 20-year rolling calendar period for the S&P 500 Index was analyzed from 1926 through 2014. The highest and lowest annual total returns for the specified rolling time periods were chosen to depict the volatility of the market. Returns include reinvestment of dividends. Indexes are unmanaged, do not incur fees or expenses, and cannot be invested in directly. Past performance is no indication of future results.
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