Building Wealth Takes Time

It may be easy to lose sight of the importance of time in building wealth. Today, the reasons are many: heightened market volatility, an increasing focus on immediacy and the influence of media in the digital age. Yet, in investing, having a longer time horizon takes advantage of compounding, which can have profound effects over time. This involves the difficult task of enduring inevitable and unpleasant short-term events like recessions and even an unexpected pandemic. The following may help to provide perspective:

Volatility is a Common Market Feature — The chart below shows the biggest peak-to-trough drawdowns each year for the S&P/TSX Composite Total Return Index and annual returns since 2000. In 12 of the last 20 years, there has been a double-digit, intra-year correction. Significant volatility is no stranger to the markets. Yet, in half of those years, the index finished in positive territory.

S&P/TSX Composite Total Return Index: Peak-to-Trough Drawdowns 2000 to 2019

Markets Are Cyclical: Nothing Lasts Forever — Equity and financial markets are cyclical. History shows that markets spend more time in positive than negative territory. Since 1956, there have been 13 bull and 13 bear markets. The average bull market has lasted 54 months, with an average gain of 131 percent, whereas the average bear market has lasted only 9 months, with an average loss of -27 percent.1 Business cycles are also cyclical, typically lasting around seven years. While Canada has had seven recessions over the past 50 years, they have lasted an average of only 11 months.

Your Time Horizon May Be Longer Than You Think — The pandemic has put pressure on many incomes, which may require some to make adjustments to retirement options or timing. But don’t overlook the opportunity to make up for lost time. Just as increasing longevity requires planning, it may also allow time for recovery. Consider that an investment with a five percent compounded annual return will double in approximately 14 years. As such, a 70-year-old may still have the potential for investments to double within their lifetime,2 and possibly even twice if they become a centenarian.

The Impact of Time in Investing Can Be Significant — Time can be one of the investor’s greatest allies. The chart below shows the impact of time in generating retirement savings: with a longer time horizon, an investor would require a significantly lower monthly investment to yield $1,000,000.

Monthly Investment Amount Required to Reach $1M Over Time*

 At Average Annual Rate of Return of… 
Years 4% 5% 6% 
20 $2,726 $2,433 $2,164 
30 $1,441 $1,202 $996 
40 $846 $655 $502 

*Assuming monthly compounding at annual rates of return shown. Effect of taxes, fees or inflation ignored.

Stay focused on your own investing time horizon and remember to keep time on your side.

1 S&P/TSX Composite 1/1/56 to 9/30/20;
2 Assumes average life expectancy of 83 years old.

Leave a Reply

Your email address will not be published. Required fields are marked *