Shortest time to invest in shares

ece9600

I have a vague idea that it's not recommended to buy shares if you're planning to hold them for less than 5 years- does that rule still hold good?

My situation is that I have a large-ish lump sum, 75% of which I am going to spend within the next 5 years (on a house renovation and mortgage overpayments). I'll invest the 25% that I'm not planning to spend. However, I'm not sure what to do about the 75%- my head says just to find the best savings rates available (£85k in each) and try not to think about the fact my money is losing value. My heart says I'm mad to do this given that I think the stock market will rise this year and I should find some relatively low risk fund instead.

I just wondered what other people would do. Obviously attitude to risk is personal and I think I tend to be quite happy with a bit of risk.

MaxiRobriguez

The reason for people saying the minimum time to hold shares is 5+ years (although many will say 10+ years) is because it irons out volatility.

You can't predict what will happen in markets this year. No one saw COVID coming, and then no one saw record highs by the end of the year after COVID happened. In the short term markets can go anywhere, so if you have a purchase horizon in the near term then it's not suitable to subject that money to volatility unless you are fully prepared that your final total for spending may be less than what you started out with.

In your situation if I was doing house renovations then I would probably extend a mortgage to facilitate it, and put the money in tax efficient wrappers for investment. But I'm young, and well paid, and could afford to do that. YMMV.

Voyager2002

Personally I would invest some but not all of the funds that I expected to need within five years. And I would choose investments where loss is less likely than the market average: infrastructure, and certain Investment Trusts follow a wealth preservation strategy. 

waveydavey48

I remember seeing a graph on a post on here with the chance in percentage terms of making any profit on shares for various timescales. If I recall correctly it was the case over the last hundred years or so that 75% of the time you would make a profit after 1 year and the chances improved as time went on.
I can't remember any more and the usual caveats apply of course.
Depends how brave/foolhardy you are I suppose.

MaxiRobriguez

waveydavey48 said:

I remember seeing a graph on a post on here with the chance in percentage terms of making any profit on shares for various timescales. If I recall correctly it was the case over the last hundred years or so that 75% of the time you would make a profit after 1 year and the chances improved as time went on.
I can't remember any more and the usual caveats apply of course.
Depends how brave/foolhardy you are I suppose.

Someone will be along to put the chart on soon enough but I think year 1 was more like 55%, with 75% only occurring until years 3 or 4.

YellowStarling

The other consideration is how time-constrained the planned expenditure is.  I.e. with things like house renovations, I may be more inclined to invest part of the 75% I estimate I would eventually spend if I thought I were able to postpone the renovations or spend if my investments took a dip, and maybe slowly release part of my investment (with gains, hopefully) over time so that there was less invested between, say years 4-5, where I only have 12 months to ride out any volatility.

In other words, I would weigh up my desire to have all the spend completed within 5 years (and, particularly, where along those 5 years I spent each chunk) vs my desire not to see my investment capital fall in real terms/possible appetite to extend the timeframe beyond 5 years to complete what I wanted to do.

JohnWinder

There’s a general notion called duration matching: you match the duration of your investment with the timeline of your need for cashing in the investment.

We know, or work with the idea, that short term investments produce lower returns than longer term investments. It certainly works with cash accounts where you get more interest for longer terms of deposit - usually. And it works for bonds, usually, with longer term bonds paying more than short term bonds (unless the yield curve is ‘inverted’). It makes sense: you lock your money up for longer, you should get more returns.

A measure of how long it takes to get your money back with bonds and cash is called ‘duration’ which, over-simplifying because it’s beyond me, means the average time to get your investment amount returned to you; so with bonds it will be a bit less time than the time to maturity, because although you get all your money back at maturity you have been getting some of it back with the periodic coupon payments each half year.

So, one wants long duration investments because they have the best returns (assuming other risks are the same), but you don’t want their duration to be any longer than the time you have until you need the cash.

What about equities? They don’t have a similarly calculated duration, but that doesn’t stop people trying to figure one out. And the estimates are something like 30, 40, or 50 years. That should be a strong hint that equities are a very risky prospect for a 5 year horizon.

The past is no promise of the future, but have a look at some multi-decade charts of diversified stocks, perhaps a global index or SP500 for which there are the longest records, and see how many five year periods you would have cried through.

MX5huggy

Maybe look at the Vanguard 2020 target retirement fund.  Designed for people that want access in the next 5 years, it’s 50% equities 50% Bonds. 

Malthusian

As others have said, it depends on how willing you would be to defer the house renovations and mortgage repayments if the stock market crashed.

If you're going to invest, I don't really see the point of investing below your risk profile just because the timeframe is shorter. If I had funds that fell (say) 15% in a crash instead of 20-25%, I'd probably still delay the renovations until they recovered their 15% fall. So the only thing investing below my risk profile would achieve is to reduce returns if the stockmarket didn't crash.

If you have a low attitude to risk and need a low-medium risk investment which focuses on dampening losses rather than capital growth to stop you panicking or having sleepless nights, then there's nothing wrong with that, but that's a different issue to investing in lower risk funds purely because your timescale is potentially shorter than 5 years.

It would be sensible to avoid smaller companies unless you are happy to delay the renovations / overpayments indefinitely in pursuit of higher growth, because they tend to take longer to recover than "blue chip" assets after a crash.

Bear in mind that if someone invested £100,000 10 years ago (random made up numbers incoming) and was now sitting on £200,000, and wanted to spend a large chunk of money on home improvements, but the stockmarket crashes and leaves them with £140,000; they may well say "I'll leave the improvements until the stockmarket recovers". Even though they have done what everyone says they should, invested for 10+ years, and if they sell at the bottom of the market they will still cash in a 40% profit rather than crystallise a loss. If they have £50,000 of work that needs doing they may or may not want to pay a premium of £21,435 to get it done now instead of waiting an indefinitely long time for full recovery.

Or they may borrow money instead, if they are lucky enough to be creditworthy in the middle of a recession.

You also have to bear in mind at this point that the prospect of their money recovering will feel extremely remote, and all the experts in the newspapers will be saying that markets will never recover or will take decades, as they did in 2009 and April 2020 - that's what makes it the bottom of the market. They may well decide just to cash in their 40% profit so that in the midst of all this doom and gloom, at least they can do something positive by improving their home.

Thrugelmir

ece9600 said:

I have a vague idea that it's not recommended to buy shares if you're planning to hold them for less than 5 years- does that rule still hold good?

There's no rules. Just statistical facts. Minimum historical period to guarantee a positive return is 12 years. The inherent danger being that the markets will already being reacting to news before you've had time to blink. Share trading is a 24/7 event. 

JohnWinder

Reader alert: there are no guarantees that holding stocks for 12 years WILL result in a positive return, even if there's never been a 12 year period without a positive return. And whether that return is inflation adjusted or not might be something to ponder.