Business people like to say that “time is money” but it is much more than that. Time is our greatest asset, but it is what we choose to do with the time that we have available to us, that will define who we are and what you achieve in life. Time is one of the few things in life that you cannot get back.
Yes, you can spend all your money one day and in the next earn it all back, but not time. There is no way of you getting back time that has past you. I’m sure people have told you to use your time wisely. What that exactly entails is up to the individual. What are your goals in life? Do you want to retire rich and live a life of luxury or would you rather spend a life with friends and exploring the world and seeing new places?
One person’s waste of time is another’s time well spent. How are you utilising your greatest asset (time) in creating passive income? Let’s explore how time affect your investment performance and why it’s a critical factor in any strategy.
Let’s start with why longer-term results can be more predictable than shorter-term ones. The answer is, simply, averaging. One data point might be noisy, but as you accumulate more and average them, the outliers tend to offset each other. As a result, the trend starts to dominate the noise. The more data points you have, the closer you get to the expected result.
Translating this to the actual investment process, we have the justification for longer-term investing. Any fund will do well in some environments and less well in others. Holding for the long term allows you to receive the average return, without trying to time the good and bad periods. Planning for the long term lets you match the actual performance of your portfolio with your needs. Further, planning to consistently put money in regularly for the long term lets you take advantage of times when the market is down.
It’s impossible to predict exactly when to get into the market – or when to get out. Buy-and-hold investing sidesteps that dilemma altogether. There really is no right or wrong time to begin investing with a buy-and-hold approach. Volatility may make it easier to find entry points, but there are plenty of attractive companies out there in every market environment if you’re willing to do the work and look for them.
Horizon risk is the risk that your investment horizon may be unexpectedly shortened. For example, you lose your job, or the roof of your house needs immediate replacement. This may force you to sell some investments, including those that you had hoped to hold for the long term. If you are forced to sell investments at a time when the markets are down, you are likely to lose money.
To guard against horizon risk, you can include some short-term investments in your portfolio. This emergency fund could be cash in a high-interest savings account or short-term bonds. If you find yourself in a situation where you are forced to sell, these investments will limit your losses.
Generally, you should reduce your allocation of longer-term investments as you come closer to the end of your investment time horizon. This will help you avoid the risk of having to sell most or all of your investments at a time when the markets are down.
Ultimately, it will also depend on our individual preferences and risk appetites. If you are the type of person who is more ambitious and willing to take risks, then there is nothing to stop you from wanting more and continuing to take higher risks even when you’re older.
If you are the type of person who is easily contented and would rather not take on as much risks, then it might be best for you to grow your portfolio steadily and gradually by investing in low-risk investments throughout your entire life.
No matter what you choose, have a strategy and use your time wisely.