Give your investments time
Archimedes is often quoted as saying, 'Give me a lever long enough and I can move the earth.' In investing, that lever is time. The length of time investments will be held, the period of time over which investment results will be measured and judged, is the single most powerful factor in any investment program. If time is short, the highest investments – the ones an investor naturally most wants to own – will be undesirable, and the wise investor will avoid them.
But, if the time period for investing is abundantly long, the wise investor can commit without great anxiety to investments that appear in the short-run to be very risky. Given enough time, investments that might otherwise seem unattractive may become highly desirable.
Time transforms investments from least attractive to most attractive and vice versa because, while the average expected rate of return is not at all affected by time, the range or distribution of actual return around the expected average is very greatly affected by time.
The longer the time period over which investments are held, the closer the actual returns in a portfolio will come to the expected average.
Risk Aversion
A risk averse investor is an...