Last Updated on April 26, 2022 by Rational thinking
Everyone understands that you need to own stocks over many years to make money. How long do you need to hold a broad portfolio of stocks before selling with a profit? How likely is it that you make a positive return over x years? If the S&P 500 is any guide, you need at least 20 years to be 100% sure.
Most people can get a good return over many decades by simply buying and holding mutual funds that follow the main market indices. You don’t need to be smart or intelligent. The simpler you do it, the more likely you are to do well. The most important element is time spent in the market.
Unfortunately, the market goes up and down. Mr. Market is manic-depressive: Sometimes asset prices go down, but fortunately, the market has over time risen in value. Most asset managers state you need at least 5 years to reap the reward compared to the risk. Most managers measure risk in terms of volatility and swings in the market.
Why is it important to understand volatility?
Volatility is important. Let’s assume you bought the S&P 500 at the bottom in early 2003 and needed to sell it in October 2008. Because of the sudden drop in prices, which we call volatility, you had to sell with just a tiny gain, compared to a much better gain just a few months before. This is the risk you face in the markets.
How long does it take to get profit from stocks?
If the history is any guide, the graph below might help you: