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If You're Investing for 10+ Years - Adding Stocks Can Reduce Risk and Increase Return

Stocks are an investment in a business entity and their value will fluctuate based on the business' perceived value – in good times the value will increase and in difficult times the value will decline, sometimes significantly. The short-term fluctuation can cause fear, but over the longer term, owning superior companies is very rewarding as you participate in their growth.

We don't have a crystal ball on what to expect in the next few years but we can look at past performance to understand a range of possibilities for different investment portfolios. 

The stats below should be used for illustration purposes only as actual short and long term returns will vary greatly from the long term averages of portfolios. Also, long term averages can and will drift higher or lower from past performance.  

The reason I am writing this is to explain investment time horizon and if you're investment time horizon is longer (10+ years) you may have the ability to ride out significant declines in market cycles. If your investment time horizon is shorter or you personally don't want to risk principal, a more conservative portfolio is the better investment.  

  • If you invested over any 10 year period since 1926, holding up to 50% stocks and 50% bonds would decrease your portfolio's risk and enhanced your return from 5.8% to 8.1% (annually). 

  • If you invested over any 15 year period, it made sense to invest closer to 70% stocks - receiving 9.16% annually versus the 5.8% -while still decreasing your overall risk.

  • If you invested over any 20+ year period, it made sense to be fully invest in stocks.  Significantly increasing your return to 11%+ annually, while having less overall risk.
    *see graphic below

The difficult part is managing our emotional responses to market fluctuations along the way.  Emotions cloud our judgement and allow us to be reactive to momentum and swings during market cycles - buying when we feel over confident, under estimating risk and chasing returns OR on the other side allowing declines to make us feel fearful that a recovery isn’t possible and the uncertainty isn’t worth the pain. 

There have been tough times and tough times will reappear:  2008 was terrifying- the market declined 40% in 8 months, companies were filing bankruptcy and there didn’t seem to be anywhere to hide.  But eventually the market stabilized and we have experienced a great rise since. 

As a general rule, funds that you plan to use for income in the next 1-5 years (sometimes up to 7) shouldn’t be invested in stocks.  If you need the money over the next few years, the long term growth potential from stocks is not worth the risk to principal.  Instead opt for a safer investment.  Only funds you don’t foresee needing over the longer term (7-10+ years) can ride out the shorter term market cycles we experience while capturing a superior long term return.

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Sources: Crandall Pierce

Legal Information and Disclosures
This memorandum expresses the views of the authors as of the date indicated and such views are subject to change without notice.  Samara has no duty or obligation to update the information contained herein.  Further, Samara makes no representation, and it should not be assumed, that past investment performance is an indication of future results.  Moreover, wherever there is the potential for profit there is also the possibility of loss.

This memorandum is being made available for educational purposes only and should not be used for any other purpose.  The information contained herein does not constitute and should not be construed as an offering of advisory services or an offer to sell or solicitation to buy any securities or related financial instruments in any jurisdiction.  Certain information contained herein concerning economic trends and performance is based on or derived from information provided by independent third-party sources.  Samara Capital (“Samara”) believes that the sources from which such information has been obtained are reliable; however, it cannot guarantee the accuracy of such information and has not independently verified the accuracy or completeness of such information or the assumptions on which such information is based. 

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