Importance of Time in Investing

Most investors beat themselves. Too impatient to wait for returns to accrue, they fail (by a wide margin) to even match index or benchmark returns.  Charles Ellis' in his book, Winning the Loser's Game: Timeless Strategies for Successful Investing identifies time as "the single most important factor in any investment program.

If you're focused on the long term, time creates certainty. If you want to be more certain of your expected investment returns – if you want to compound your money at the highest possible rate with the lowest possible risk – mastering time is the key. You must learn to look past short-term noise. Long-term investors must learn to hold stocks for at least 10 years.

In fact, at 10 years, you're only just beginning to achieve certainty. According to Ellis, out of all possible returns for the S&P 500 in all the 10-year holding periods from 1900-2000, there's only one loss. The average annual gain is anywhere from 5% to 15%.

To really use time to create certainty, you need to go out even farther than 10 years. The range of returns for all the 20-year holding periods during the last century contains no losses, only positive returns. The average annual returns range anywhere from 1% to about 12%.  A one-year holding period is purely a gamble. At 10 years, you're an honest-to-goodness investor. At 20 years, you're demonstrating mastery of time. And mastering time is how you beat the market.

If you really want to be certain you're not going to lose money, you shouldn't invest with money you're going to need in less than 10 years. If you can't wait for your returns to arrive, you can't be certain you'll earn them.

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