I often get this question: “Why is investment time horizon always mid to long term?”
In this day and age where we have instant coffee, instant noodles and instant messaging, why can’t we have instant returns as well?
Let’s examine this issue.
What happens when we invest for a month?
Lots of ups and downs just to make 1% return in a month, very risky, right?*
What happens when we look longer to 1 year?
Oh, bad, bad, bad, after a year less than 1% return. If sell at right time maybe can make 2% gain, but sell at wrong time can make 4% loss.
How to invest in this case? Don’t know when to enter, when to exit. But what if we look longer to 5 years?
35% return over 5 years, or a simple return of 35/5 = 7% return per year. Now we are getting somewhere.
What if we look even longer to the start of data?
96% return over 16 years, or a simple return of 96/16 = 6% return per year. So quite similiar to previous result, looks like a more consistent plan is to invest over the mid to long term!
So it’s quite simple. When we make an investment plan, we will want to control the result as much as possible to fulfil the plan. Or else the plan fails. Hence only by investing over the long term can we fulfil our plan consistently.
In fact, when we invest over the long term, the above graph looks more like, this:
They are both actually the same graph, but one is daily result tracking and the other is quarterly result tracking. The data is the same but the feeling is different. It feels as if the second graph conveys a sense of more stability and consistency.**
However the problem is that the environment nowadays make it difficult to do so. Everyday we read newspaper it feels like something is happening and we feel like responding by selling our investments and keeping them under a pillow even though we know it is the wrong thing to do. Without enough knowledge, discipline, time and advice, our emotion of instant news and instant action will not get us the long term result that we desire.
(*For simplicity sake, we just look at Malaysia case in a broad sense – hence using KLCI as an example.
**Which is why fairly or unfairly people will feel that property investments are more consistent because there is no daily price available.)