Stocks can be volatile and at times, it can be scary to ‘stay the course’. Over the last 40 years, the Sensex has had annual returns that have ranged from +90.6% to -52.6%. Nearly doubling your money doing something as simple as investing in a broad index is attractive but there is also the risk of losing a substantial portion of your investment. Unfortunately, you can’t predict when positive returns will occur on any given day or any given year. History has shown us that investing over the long term can smooth out returns so that on an average, annualized basis, you will have a positive return.
In the table below, we show hypothetical annualized returns from the Sensex assuming that you invested for a total of anywhere from 1-year to 30-years and what year you sold your investment. For example, if you look at the year 2013 (the year you hypothetically sold your Sensex investment) and you invested for one year, you would have a return of 9%. If you had invested for two years, your annualized return for each of the two years would be 16.0%.
At a 10-year investment horizon, historically, nearly every time period would have resulted in an average, annualized positive return. Holding for longer periods from 15 to 30 years has always resulted in positive annualized returns. It really is about time in the markets and not timing the markets.
Investing over the long run can help mitigate risk by giving your investments time to recover from market downturns. Over short periods of time, market fluctuations can have a significant impact on your investment returns. However, over the long run, the effects of market fluctuations tend to even out, reducing the impact of short-term market volatility. By staying invested for the long term, you can maximize your investment returns and build long-term wealth.