Transcript:
Easan Arulantham:
So what is time horizon? And how does it change my outlook?
Tom Vaughan:
What is time horizon? And how does it change? Okay? So I’m assuming that means with investing, right? So if I look at investing, this is really fascinating. Because this comes up all the time, you kind of need to understand what has happened historically with the stock market to understand how much time horizon can impact what you’re thinking about doing. So if you look at say, the worst one year, that’s happened, you know, let’s say since 1970s, early 70s. In the total stock market itself, it was down about 43%. So if you come to me and say, hey, you know, I want to buy a house in a year, and what what, what stocks should I buy? Or, you know, what portfolio? Should I have? The answer is you shouldn’t have any, at all, you should put that into your bank account CDs, something that’s guaranteed. Now, the best rate of return for a one year period, the market was up 66%. So you could get lucky. You could put money in roll the dice, and hope that that gain comes through, right, yeah, and the market does go up more than it goes down. So I think you have a slightly higher chance of getting lucky than unlucky. But my answer, there would be that you shouldn’t invest for that short of a time horizon, the worst 10 year write rate of return was down two and a half percent. And there hasn’t been a 12 year period, at least since the early 70s, where you didn’t have a positive rate of return. So longer term outlooks for stock market mixtures is much, much easier to accomplish what you’re trying to do, which is grow your assets than shorter term concepts, and I’ve run into a lot of people or have a lot of misconceptions about that. You know, and I’ve seen an awful lot of people with short term goals, rolling the dice. And obviously, it didn’t work this year, it worked in 2020. Yeah. Worked in 2021, actually, is not working in 2022.
So really, take a look at the time horizon that you have for your investments, and consider what you’re trying to do. They’re either, you know, stick with the investments and change your time horizon. Like, hey, this money I was saving for my house, and it’s in the market, it’s down now. Right? That maybe I’ll just use that for retirement or something long term. Yeah, I’ll keep adding a little bit to it. And I’ll build up the house money somewhere else, usually, it’s hard to do that, because houses are so expensive, right? Take so much capital to do that. Or you just, you know, get out of it. And, you know, maybe change the time horizon, we’re gonna buy a house. Right, wait till the market comes back around, continue. I mean, if you’re one, still a gamble, but it’s I guess it’s sort of a middle line, right? You can continue to buy, right? I’m gonna buy an okay, maybe I don’t buy a house at the end of this year. Maybe it’s two years from now. Okay, fine. I’m going to keep on buying because I’m already in, I’ve already lost money. I’m going to keep going. So you know, different strategies. But if you’re starting off, and you were to ask me about time horizon, that’s what we’ll find all financial planners and advisors. That’s one of the first questions we have is, well, how long? You know, you have before you need the money, because it denotes what you should do with that money. Because, essentially, you’re playing a game of probabilities. And so I would be really careful for short timelines, you know, getting involved in the stock market, personally.
And so that’s why it’s important. If you’re, you know, looking out for retirement or in retirement, you want to have something that has, you know, some sort of equity or stock portion, because you need your money to keep growing and so, if you have 1520 years, it’s likely that you’re going to have a positive return and so that’s why you want to be in the market.