SteadyOptions is an options trading forum where you can find solutions from top options traders. TRY IT FREE!

We’ve all been there… researching options strategies and unable to find the answers we’re looking for. SteadyOptions has your solution.

The Importance of Time Horizon When Investing


According to Investopedia: Investment horizon is the term used to describe the total length of time that an investor expects to hold a security or a portfolio.The following set of charts are a great visual aid to help investors plan and set expectations for investing in the stock market.

 

Definitions:

  • DFA Domestic Balanced Strategy Index: This is a diversified blend of Dimensional US equity indices. The index is weighted roughly two-thirds large cap and one-third small cap, along with a tilt towards value. Indices are hypothetical and cannot be invested in directly.
     
  • One-Month US Treasury Bills: This is a commonly used proxy for the risk-free rate of return on cash.


Stocks are highly volatile in the short term, for example a holding period of one year. The following chart plots all rolling 12 month returns since 1950.


image.png
 

This chart tells almost everything we need to know about investing in stocks for a 12-month period. If that’s your planned holding period, don’t do it! Not only will the investment frequently underperform cash, it will lose money. Sometimes a boatload of money with 12 month returns ranging from approximately -50% to +80%! On a year by year basis, extremes are normal.

 

If the investment will need to be liquidated for a lump sum of capital within the next 5 years (i.e. a home down payment, car purchase, tuition payment or a readily available emergency fund), it’s probably best to not place the capital in the market as we can see in the next chart.

 

image.png

 

This chart is less noisy, but there are still periods when stocks have lost money over a 5-year period and even more when stocks underperform cash. For this time horizon, it’s reasonable to keep the lump sum capital in cash. Investors with the willingness to accept risk could consider keeping a modest portion in stocks with the awareness the money could be lost.

 

At 10 years, the advantages of investing in stocks is seen more clearly.However, history shows there is still no guarantee. For example, as recently as the bottom of the 2008-2009 crisis, the DFA index just barely produced a positive return over the prior 10 years and would have underperformed cash. Note that an S&P 500 only investor would have done far worse, losing about 30% of their capital during this period highlighting the benefits of the size and value diversification in our DFA index.

 

image.png

 

Experience teaches that many investors tend to think 3 years is a long time, 5 years is a really long time, and 10 years is an eternity. Yet history shows us that at even the 10-year time horizon, expected return relationships (such as stocks to outperform cash) don’t always materialize. This must be true, otherwise there would be no risk.Investors with a 10-year time horizon before needing to liquidate funds (a frequent example of this is a child’s 529 college fund), should invest a portion of the capital in bonds and cash with plans to increase the amount invested each year. Of course, all of this depends on each individual’s willingness and need to take risk, which is why financial planning is a personalized case-by-case process. It gives advisers the opportunities to help investors achieve their goals wisely and with the least amount of fear and stress in the process.

 

 The next chart shows the 20 year rolling returns. Many investors in their 50’s and 60’s don’t think this time horizon applies to them because they envision retiring at age 65. What many forget is that the time horizon for retirement planning is different than oneforpaying for a child’s college education. When a child goes to college, the expected depletion of the account is typically within 4 years. A couple entering retirement usually needs to make the capital last for up to 30 years by taking a series of smaller annualized withdrawals.A child entering the first year of college should typically have very little in stocks while a couple entering their first year in retirement will typically want to have the majority in stocks.

 

978860680_240MonthsVsT-bills.jpg.8274ed21871f8ae8ee2f06ba643fe309.jpg

 

We see that there are no 20-year periods where stocks underperform cash for the DFA index since 1950. If a retirement investor follows the conventional approach of a 4% safe withdrawal rate, 96% of the portfolio remains invested each year for growth. Annualized stock market returns are much more stable historically once to and beyond this timeframe with the gap between the best and worst periods ranging from approximately +5% to +19%.

 

Last, study a 30-year periods;the contrast between this chart and the 12-month chart is significant.

 

image.png

 

At the one-year time horizon, it’s hard to justify investing in stocks. At the 30-year time horizon, it’s hard to justify not investing in stocks. Risk for short term capital is volatility of principal, while risk for long term capital is erosion of purchasing power due to inflation. Good financial planning considers the time horizon for each objective and invests the need capital accordingly. 


Jesse Blom is a licensed investment advisor and Vice President of Lorintine Capital, LP. He provides investment advice to clients all over the United States and around the world. Jesse has been in financial services since 2008 and is a CERTIFIED FINANCIAL PLANNER™ professional. Working with a CFP® professional represents the highest standard of financial planning advice. Jesse has a Bachelor of Science in Finance from Oral Roberts University. Jesse manages the Steady Momentum service, and regularly incorporates options into client portfolios.

 

What Is SteadyOptions?

Full Trading Plan

Complete Portfolio Approach

Diversified Options Strategies

Exclusive Community Forum

Steady And Consistent Gains

High Quality Education

Risk Management, Portfolio Size

Performance based on real fills

Try It Free

Non-directional Options Strategies

10-15 trade Ideas Per Month

Targets 5-7% Monthly Net Return

Visit our Education Center

Recent Articles

Articles

  • The Big Loss

    At his blog, Joey offers his perspective on the top reason that so many trader wannabes are not, and will not, become profitable traders. His post is titled: Learn to Lose Money to Make Money. Here are the Excerpts from the blog.

    By Mark Wolfinger,

    • 0 comments
    • 259 views
  • ETF Vs. Stock: Note Down the Vital Points

    Today’s small investment can fulfill your dream of high living tomorrow. But investing blindly can make it reverse. We all want to get a high return on our investment. Stocks or ETFs can be the best option for you in such cases. The investment in stocks or ETFs is not very different except few noticeable points.

    By Kim,

    • 0 comments
    • 292 views
  • Considering Trading? Here Are Some Trading Options You Need To Know

    Whether you are considering dabbling in day trading or looking for a longer-term investment if you want to start trading it will serve you well to carry out a little due diligence in advance. There are a number of markets that you could use and understanding how each one works and what they are all about is key.

    By Kim,

    • 0 comments
    • 5,864 views
  • Why Should You Paper Trade Options

    In my previous article I shared some thoughts why I believe traders should start with paper trading before committing real capital. Not everyone would agree, but today I would like to share another article by a trader I respect very much. The original article was published here

    By Kim,

    • 0 comments
    • 295 views
  • Is Long Call Better than Bull Credit Put Spread?

    The trigger to this article was a question posted on the forum: "why we should use bull credit put spread when you can just long call they both have limited loss both in long call you have unlimited profit why limited it with bull put spread?" You can read the discussion here.

    By Kim,

    • 0 comments
    • 446 views
  • Strike Selection: A 'Sweet Spot' for Option Sellers?

    The words above are powerful because they're approach-agnostic. It doesn't matter if you're an old-school pit trader who swigs grit instead of coffee before the opening bell, or a Gen Y technocrat who codes trend-detection algorithms. All traders live and die by The Four Words. If you consistently buy low and sell high, then you will be profitable.

    By Kim,

    • 0 comments
    • 1,557 views
  • Post-Earnings Implied Volatility Crush

    Earnings crush is the fall in implied volatility after earnings is announced. Typically, earnings announcements cause the price of the stock to move more than normal. The move will have more effect on short dated expirations since the day of earnings large move has more weight than the rest of the days with normal moves. 

    By ORATS_Matt,

    • 0 comments
    • 352 views
  • Why Not to Hold Strangles Through Earnings

    In my previous article, I described a strategy of buying strangles a few days before earnings and selling them just before earnings. In this article, I will show why it might be not a good idea to keep those strangles through earnings.

    By Kim,

    • 0 comments
    • 387 views
  • How to Prepare for Crypto Downturns

    Most cryptocurrency owners skipped a heartbeat when the bitcoin fell to 50% from its all-time high. According to experts, such nasty downturns are natural, and the crypto market may witness such downturns now and then.

    By Kim,

    • 0 comments
    • 520 views
  • Tradier Brokerage Special Offer

    Tradier Brokerage is partnering with SteadyOptions to offer a special promotion for SteadyOptions customers: Open an account with Tradier Brokerage and get no subscription fees for 3 months, plus all ACAT fees will be waived. After opening an account, you will also receive 3 months of free access to TradeHawk, our full-featured customizable trading platform.

    By Kim,

    • 0 comments
    • 661 views

  Report Article

We want to hear from you!


There are no comments to display.



Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account. It's easy and free!


Register a new account

Sign in

Already have an account? Sign in here.


Sign In Now

Options Trading Blogs Expertido