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The One Investment Article That Is A Must Read: How Long Does It Take To Be A Long-Term Investor?

How long does it take to become a long-term investor? Past performance is not a guarantee of future results but ignoring history is unwise.

According to Craig Israelsen, Ph.D., a well-known investment states that academic, over the last 93 years, the four major asset classes — stocks in large and small companies, 10-year U.S. Treasury bonds, and 90-day Treasury bills — through the end of 2018 offered returns and risk levels as shown.

The period encompasses all of modern Wall Street history, some of the best statistics for understanding investing. Owning stock in large U.S. companies averaged a 9.99% return nominally, which is economic-speak for saying "before adjusting for inflation".

Since 1926, and through December 31, 2018, there were 59 35-year rolling calendar-year periods of returns. Shown in this chart is the percentage of times over the 59 35-year rolling calendar-year periods from 1926 through the end of 2018 that each asset achieved the average 9.9% annual return.

According to Israelsen, the 9.9% return of large company stocks was achieved 92.0% of the time with a 35 year-holding period since 1926, but in just 57.0% of the five-year rolling periods since 1926.

The four groups of bars on the left show the performance of each individual asset class. A portfolio combining the four assets is on the right.

The longer individuals hold their investments — the longer their horizon, their holding period — the more likely they were to achieve a long-run return.

Keep in mind, holding large-cap stocks 10 years versus 35 resulted in a lower-than 35-year holding period 57% versus 92%, but the difference in returns was not so far off.

On the flipside, if individuals failed to achieve the long-run return, in the case of large U.S. stocks, what was the performance gap when an investor did not achieve a return of 9.99%? The tallest dark blue bars are on the right side of each cluster represent five-year holding periods. If one’s holding period was only five years, their average annual return was 781 basis points — 7.81% — annually lower over all of the rolling five calendar-year periods since 1926. In the 43.0% of the time that failed to achieve a 9.99% or higher return, the performance gap was 781 basis points. That shows the shorter one’s time frame, their holding period, the more likely they are to really miss the long-run return. If they held for 10 years, they were below the long-run return by 411 basis points. If one hangs in there for 35 years and did not achieve the long-run return, they only missed it by 58 basis points. The past showed the longer one stayed in, even if they don't achieve the long-run return, they missed it by less by holding longer.




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