Thoughts in Charts: Time Matters

I’m not sure you could build a better chart to illustrate how important time is to risk than this one!

First, let’s get oriented to what the bars represent. This chart tracks period long returns that tick forward year-by-year. For the 1-year returns, this forward tick is fairly intuitive because it’s 1 calendar year and then the next calendar year. What “rolling” means on the 5-year and longer chart is that it summarizes 5-year returns moving forward one year at a time. This is helpful because it means it’s summarizing more periods than it would had it moved forward in multi-year blocks.

The green bars represent the returns of a stock portfolio made up of the 500 largest US companies. In 1-year periods, the returns have ranged from up 47% to down 39%. Yikes! That’s a wild ride. If you scoot over to a 5-year period though, the range narrows significantly. The best 5-year period returned 28% while the worst lost -3%. If we look at the far right, the best 20-year period was 17% while the worst was 6%.

Let’s be clear, this chart doesn’t say what your return will be. What it does show is that it’s reasonable to expect that the longer that you are in the stock market, the better your chances are of a positive outcome. If you have 20 or more years until you need your invested money, it’s reasonable to take on more risk.

The blue bar represents a portfolio of bonds. In the 1-year period, you can immediately see a much lower historical downside volatility. When you move over to the 10-year period, this segment of the market has historically always landed in the positive return range.

Notice that this less risky asset class has never had a return as high as the green stock bar. If you look at the 20-year range, the bond market’s lower risk lands both the upper and the lower parts of the bar in less favorable sections than the green stock bar.

As I said last week, time helps us think about how much risk to take and risk helps determine the opportunity for return.

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