Long-term investing lowers risk

Historical data shows that it is enough to invest funds in the American stock market for 5 years to gain 80%. chances of profits. If we keep the investment for 13 years, the chances increase to 90%. The German stock exchange gives us even greater chances of profit, while the British stock exchange gives us even less chance of profit. Long-term investing is one of the ways to minimize market risk.

Long-term investing has its advantages

One of the basic strategies to reduce the risk of investing in the stock market is long-term investing. As time passes, the chances of making money in the market increase significantly, according to the well-known market adage "time in the market, not timing the market". The point is that the time of our presence on the market is more important than trying to find the best time to buy or sell shares.

This can be confirmed by analyzing 150 years of US stock market performance based solely on share prices (from Robert Shiller - excluding dividends), over 300 years of UK market returns (UK All-Caps), as well as a 66-year history German DAX index. The chances of making money in any given year on these exchanges are at least 60%. To get 80 percent a chance to make a profit, we should invest on the American and German markets for at least 5 years, and in Great Britain for 7 years. This chance increases to 90 percent when we have been on the stock exchange in the US for 13 years and in Germany for 12 years. It turns out that achieving certainty of profits is most difficult in the UK, where during the period examined there was no period of 20 years or less in which the probability of profit was 90%. or more.

Source: eToro

The market is still evolving

It's worth noting that stock market performance cycles are now shorter, as are their length and depth recession. Since 1950, the S&P 500 Index has experienced an average of 3 price declines per year compared with 7 declines in the period 1875-1950. Economies are less cyclical, central bankers (the vast majority) more competent, companies more profitable and driven by technological development.

Of course, there have been periods in history where stock market declines lasted longer, extending the time it took to make profits. Japanese Nikkei 225 it took thirty-four years to regain its peak during the 1990 housing bubble. Index S & P 500 it took twenty-two years to recover from its 1929 peak before the Great Depression, and thirteen years to rise above its pre-tech bubble level in 2000. The UK's FTSE All Share Index is still below its 2018 high. Historical data, however, indicate that ultimately human entrepreneurship and ingenuity always overcome crises, bringing a real increase in company profits, as well as cumulative returns on the stock market. However, let us always remember that time should not replace investor involvement, diversification or portfolio balancing.

About the author

Pawel Majtkowski - analyst eToro on the Polish market, which shares its weekly commentary on the latest stock market information. Paweł is a recognized expert on financial markets with extensive experience as an analyst in financial institutions. He is also one of the most cited experts in the field of economy and financial markets in Poland. He graduated from law studies at the University of Warsaw. He is also the author of many publications in the field of investing, personal finance and economy.