how long before you can judge a long term investment

[rigz]

as a relative new investor, I have basically been pumping money into a vanguard retirement fund (and doing nothing else). I do this in my ROTH, my SEP and even more into a separate non-retirement investment account.

so far its been about a year and I am basically at 0 - no gains, no losses. I'm ok with that so far...as long as I am doing it right. I understand its long term (is that 5 or more years?) but what I don't want to happen is for me to look back in 5 or 10 years and realize that I did something wrong at the beginning. I want to make sure, if I am making a mistake, to find out now and correct it.

as expected, every month it goes up and down...its composed of a lot of stocks and I get thats what they do. but over a long period of time I should have a decent return right? like 5%..6%...maybe 7%? something. so at what point can I look and think "ok well I'm still not getting anything back. maybe this is wrong"

[jpg7n16]

Two words: asset allocation.

Beginners' Guide to Asset Allocation, Diversification, and Rebalancing

[jpg7n16]

I guess I should explain that more.

I say asset allocation, because that's the leading driver of long term investment risk and returns.


And no - 1 year is not a "long timeframe" like you said in your post. 1 year is incredibly short. It's like going on a 30 mile drive, but calling it quits and heading back home because you had to go through a school zone on your way to getting on the highway. You're barely a mile into the trip, and you're turning back?

Just out of curiosity, how long will it be before you actually need those funds?


Investing involves risk - including the risk of loss. In other words, you may go years without making anything at all, even lose money for years in a row.

But if you keep your asset allocation in line (hence my post), over actual long periods of time, say 25-30+ years, you should average around 5, 6, 8, 10% <based on how risky you go>.

[rigz]

I guess I should explain that more.

I say asset allocation, because that's the leading driver of long term investment risk and returns.


And no - 1 year is not a "long timeframe" like you said in your post. 1 year is incredibly short. It's like going on a 30 mile drive, but calling it quits and heading back home because you had to go through a school zone on your way to getting on the highway. You're barely a mile into the trip, and you're turning back?

Just out of curiosity, how long will it be before you actually need those funds?

a long time. 10 years minimum. probably 20 or more (never know what will happen but the plan is for a long time from now).

I totally understand that one year is a really short period of time. just want to make sure my lack of returns is normal and not because I'm doing anything wrong (eg, investing in the wrong things). if there is a mistake i want to catch it on year 1, not year 10.

it just sometimes it feels like im wasting my time...nothing is happening and i dont feel like im making progress.

Investing involves risk - including the risk of loss. In other words, you may go years without making anything at all, even lose money for years in a row.

But if you keep your asset allocation in line (hence my post), over actual long periods of time, say 25-30+ years, you should average around 5, 6, 8, 10% <based on how risky you go>.

ok - that makes sense. and when you say for example, "8% per year", you dont mean 8% in just the "good" years...you mean it'll average out to 8% over the entire 20 years. (meaning some years make 0, some years lose a little, some years make way more than 8% but the average is 8% per year over the life of the funds? is that right?)

thanks for the answer

[disneysteve]

and when you say for example, "8% per year", you dont mean 8% in just the "good" years...you mean it'll average out to 8% over the entire 20 years. (meaning some years make 0, some years lose a little, some years make way more than 8% but the average is 8% per year over the life of the funds? is that right?)

That's correct. When you see mutual fund performance numbers, they are listing average annual returns. So if the fund is up 12% in year 1, down 4% in year 2 and up 16% in year 3, you will have a 3-year average annual return of 8% even though no one year actually saw that return and one of three years actually lost money.

I have one fund that has returned as much as 70% in one calendar year but the long-term average return is far lower than that. I just checked one of my funds. It has a 1-year return of 8.79%, a 3-year average of 31.22%, a 5-year average of 2.98% and a 10-year average of 11.4% so it very much matters what time period you are looking at. The longer the better.

Another of my funds has a 1-year return of -34.48% (yep, it's been a lousy year) but the 10-year average is 14.72% which is quite good for the long term.

Focus on allocation, as JPG mentioned, and rebalance periodically to adhere to that allocation. There will be good years and bad years and fantastic years. The hope is that over 20 years, it will all balance out to a nice long-term average.