Accordingly, core to getting your head right for investing is having a rational perspective on time frame, risk and expected return. This section on Time Frame and Mindset is all about helping you understand and appreciate how much time you have to work with and to take full advantage of that runway.
Under this tab, I cover six aspects of developing the right mindset — revolving around time frame and temperament. Hover over the tabs for the key take-way for each. Click on each tab for a more detailed exploration, including numerical illustrations and practical suggestions.
I. Defining Your Time Frame
Now until the time you need the money for any financial goal. Segment accounts for each goal.
II. The Power of Compounding
The return you make on your money this year earns its own return next year. Start early and stick to it, and a little grows to a lot. Even small improvements in annual returns make a big difference.
III. Understanding Risk
Investment results depend on what happens in the future, and the future is of course uncertain. Uncertainty is risk, and risk comes in many forms—not generating sufficient returns, permanent loss on some investments and near-term price swings.
IV. Taking Advantage of Time Frame
With a 20-year perspective, the types of investments likely to generate higher returns become much more predictable. When you have the benefit of this kind of time frame, use it; invest in stocks, the highest returning asset class.
V. Recognizing Your Emotions
Even though logic suggests you will very likely reach your 20-year destination, the ride at times will be more roller-coaster than railroad. Understand that and prepare yourself.
VI. The Dangers of Market Timing
When exiting and re-entering the market, you need to be right twice. This is very difficult, especially when your emotions conspire against you. Better just to sit tight.