20
April
2017

Investment time frames & market risk

What is the expected time frame?

The most important factor in determining our exposure to growth assets is the expected investment time frame. Growth assets over time have higher returns, but are also more volatile. The aim of financial planning is to select the appropriate level of growth assets to suit an investor’s needs.

The longer the time frame, the safer it is to have a higher exposure to growth assets.  In finance statistics the reason for this is known as Mean Reversion. This essentially means that despite having unstable results in the short term, over long periods of time the average is reasonably stable and predictable.  Over any given year, the range of results is quite large, with returns either well above or well below long time averages.

Over an extended period, we are going to experience a number of good and bad years. The more years we have, the more likely it is we are going to have a total return closer to the long term average.

As mentioned above, the higher exposure to growth assets, the greater variety in investment returns.  This translates to a greater number of results (of both good and bad years) required for an accurate return to be predicted. 

In practice, this means we need to invest for an appropriate length of time so that we have enough good and bad years.  That way, the average return will be somewhere near what we expect (i.e the long term average).

More conservative investments have a much lower range of returns; meaning we don’t have to invest for as long.

If we invest in a portfolio with a high exposure to growth for a short time period, and the markets experience a loss in the first or second year, it is conceivable that we will lose money on the investment, or at least experience returns below what we would expect.

For a portfolio consisting solely of growth assets, it is recommended to invest for a period of at least 9 years.  Alternatively, a portfolio invested in 50% growth assets would have a minimum time frame of about 4 years.

 

For these reasons, when developing an investment portfolio, the first thing we look at is how long we are prepared to lock up the money. This dictates how aggressive we can be with a portfolio – conservatively for the short term and higher growth options for goals in the more distant future.

Author; Alex McKenzie Categories: Future Financial Services Blog

About the Author

Alex McKenzie

Alex McKenzie

Owner at Future Financial Services

Past:

  • Paraplanner at Zammit Partners Investments
  • Unit Trust Administrator at Colonial First State

Education

  • University of Western Sydney
  • Penrith High

About

As a Financial Planner I help people to achieve what they would like in life. This involves helping you to identify the things in life they would like , developing plans to help achieve them and strategies to protect what you already have. We do this by providing Financial Advice to guide you through your life stages.

The financial planning process involves determining a clients current situation and financial objectives and tailoring strategies to assist in best achieving those objectives.

I am an expert in superannuation, investments and insurance, these are tools we use to help you achieve your goals.

I aim to use my knowledge of superannuation, taxation and Centrelink to efficiently use your assets and income to achieve your financial goals.

Retirement and pre-retirement planning, wealth creation, asset protection, insurance planning and estate planning are all areas of advice that I provide.

Leave a comment

You are commenting as guest.