Time outshines luck

Time is a silent superpower for investors. It can do wonders. You just have to let it work its magic. But that can be torture to do at times.

I have written in the past about how large of a role luck can play in investments. But time can neutralize the role of luck. It can transform a bad-luck purchase into a decent buy, years later. Investments that looked ill-timed in the first year or two can shape up and appear respectable with the benefit of time.

Consider two examples.

There is reliable data going back to 1950 for U.S. stocks and Kansas non-irrigated farmland. Both investments show how time heals most investing wounds.

Let’s first consider U.S. stocks. We can examine returns over different timeframes for the S&P 500, which is a basket of 500 of the largest publicly traded companies in the U.S. On a one-year basis, the best return produced since 1950 for the S&P 500 is 47 percent. The worst one-year return is -39 percent.

That’s an enormous range.

But if we widen the lens to cover multi-year periods, the range begins to narrow. Over rolling five-year periods, the best return has been 28 percent a year, and the worst return has been -3 percent a year.

We can do the same thing over longer time periods.

The best annualized return over 10 years was 19 percent. The worst was -1 percent a year. Losing 1 percent every year for 10 years wouldn’t be much fun. But a funny thing happens if you would have just held on to the investment. Over rolling 20-year periods, the best return would have been 17 percent a year. But get this. The worst return for U.S. stocks over any 20-year period since 1950 was 6 percent a year.

The more time you have, the less you need to rely on luck. U.S. stocks will do well over time – even if you purchase them at a terrible time. If history is any guide to the future, as long as you have more than 15 years, you can count on U.S. stocks generating a positive return.

That same phenomenon occurs with Kansas non-irrigated farmland.

Here are the best and worst annual returns for farmland over various time periods:

One Year: 27 percent; -18 percent

Five Years: 18 percent; -10 percent

10 Years: 14 percent; -3 percent

20 Years: 9 percent; 0 percent

In Kansas farmland, there is just one time-period that wrecks long-term performance. If you bought in the early 1980s, your experience probably hasn’t been great. Outside of the 1980s bubble, Kansas farmland returns have tended to hover in the 5 percent to 7 percent range over long periods of time.

Almost all investments follow this pattern – not just stocks and farmland.

Anything can happen over the short-term, but over the long-term, the results are likely to fall into a predictable range.

Keep in mind, this doesn’t hold true for individual company investments. We see outliers in individual companies all the time. Your experience can be drastically different. You could buy a Microsoft-type investment and make millions, or you could invest in an Enron-type of disaster and lose everything. But if you are reasonably diversified, the pattern holds true.

When it comes to investments, over short periods of time, Lady Luck plays a starring role. But if you’re a long-term investor, Father Time will steal the show.

All you generally have to do is sit back, watch and wait.

Justin Lueger is President of Invisor Financial LLC, a registered investor adviser firm in the State of Kansas. All opinions expressed are his own and should not be viewed as individual advice. He can be reached at [email protected]

This column is paid for by Invisor.


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