Are you thinking about making a major purchase in < 10 years, but don't yet know whether this purchase will actually happen and if so, when exactly you will make it (new car, buying a property, lover + divorce, ...)? Is your heart bleeding because your money is rotting away in your call money account? But you can't help it because any investment in ETFs < 10 years represents an incalculable risk? Then you should read this article!
Our world is not black and white. There are gradations, transitions are fluid. The reasons for investing (or not investing) are different and individual. More detailed information is important in order to be able to assess the risk and the opportunity. Only then can we make rational decisions based on our individual risk profile. Based on the historical performance of the S&P 500, in this article we will look at whether you are actually entering the antechamber of hell if you only hold an ETF for 1, 2, 5 or 9 years. And if not, how much higher is the risk compared to a holding period of 10, 15 or 20 years?
Important: This article deals exclusively with the risk you take with a short investment period in a broadly diversified portfolio. The opportunities offered by such an investment period are not considered. Nor does it consider strategies that involve early/frequent buying and selling of securities. The aim is therefore to be able to better assess the risk taken if the money invested over the long term may have to be paid out after less than 10 years.
Conclusion & tl;dr
If history repeats itself, an ETF on the S&P 500 can be held for only 9 or possibly even 8 years instead of the often recommended 10 years - with a relatively low risk premium. In the case of a one-off investment, even an investment horizon of just 7 years would be completely unproblematic. Nevertheless, the past has shown that even with an investment period of 10 years, a loss of up to 50% is possible in the worst case with a one-off investment or 40% with a savings plan.
However, there is also good news for the less risk-averse investors among us: In the last 95 years, there has never been a time for a one-off investment / the start of a savings plan in / on the S&P 500 with which one was still in negative territory after 19 or 17 years.
Data basis and procedure
The analysis in this article is based on the performance of the S&P 500 index from December 1927 to June 2022 [1]. I would have liked to use a world index as a basis, but unfortunately I do not have sufficiently detailed data going back long enough. If you have any, please let me know. It should be noted that the performance of a specific ETF can of course differ from the index - e.g. due to the annual costs, costs for the execution of the savings plan, the structure of the ETF and tax aspects.
As the companies in the S&P 500 not only grow, but also pay dividends, this was also taken into account [2]. I ignored the ex-dividend date for the sake of simplicity and assumed a flat rate of 27% for dividend taxation. I have also assumed direct reinvestment of the dividend.
The procedure itself is relatively simple. The same amount is invested each month over different periods (for one-off investments only one month) and offset against the monthly increase (or loss) in value according to the index. After the savings phase, the invested amount may be left for a certain period of time, i.e. no further savings are made before the money is paid out. Dividends paid are taken into account over the entire period. The central question is: In how many cases do I leave the business with a loss, how high is this loss and how much do these figures change as the investment period falls/increases?
Assessing the risk correctly
We look at the absolute risk of loss: In how many cases (in percentage terms) was a loss / gain made over an investment period of X years? If 100 cases are considered, 98 of which end with a profit, the absolute risk of loss is 2%. However, if a profit is only made in 97 of the 100 cases, the absolute risk of loss is 3%.
The relative risk of loss is also an important indicator. It indicates the percentage by which the risk of loss increases/decreases compared to a reference value. In the two examples from the last paragraph, the increased risk of loss in the second scenario appears so low at first glance that it can be ignored as an investor. What is 1% more risk or 3% total risk? Much more than you might think. In relative terms, the risk of loss actually increases by a whopping 50% (2% * 1.5 = 3%)! The probability of making a loss in the second scenario is therefore 1.5 times higher than in the first scenario.
It is also important to consider how high possible losses are. As an investor, I might accept a 20% probability of having to sell my investment at a loss, provided the loss does not exceed 10%. On the other hand, a risk of loss of only 5% may be too much if the amount of the loss could be up to 90%.
To make a rational decision, all three key figures must be considered. How high is the absolute risk of a loss? By what percentage do I increase my risk of loss compared to the reference value if I exit earlier? And what level of loss should I expect?
Risk acceptance varies greatly from investor to investor, which is why everyone should ask themselves how much risk can be taken and at what point the risk is too great. Accordingly, I will present you with the key figures mentioned here so that you can make an individual decision.
The reference (hold for 10 years)
Let's first take a look at our reference value: we invest once and hold for 10 years. There are a total of 1,014 possible investment points in time, every month from 01.12.1927 to 01.05.2012. After 10 years, we are left with a negative result in 120 (without dividends) or 66 (with dividends) of the cases. This corresponds to a risk of loss of 11.8% and 6.5% respectively.
How often do losses occur and in what amount (including dividends)?
- 3x between 50% and 40%
- 8x between 40% and 30%
- 17x between 30% and 20%
- 23x between 20% and 10%
- 15x less than 10%
Unsurprisingly, the years / months around 1929 and 2000 were particularly susceptible to losses.
However, if the S&P 500 is saved with a constant amount every month for 10 years, the risk can be reduced somewhat. In 94 (without dividend) or 29 (with dividend) of the 1,014 cases, a negative result was achieved. This corresponds to a risk of 9.3% and 2.9% respectively.
The losses in this scenario break down as follows (incl. dividend):
- 1x between 40% and 30%
- 5x between 30% and 20%
- 9x between 20% and 10%
- 14x less than 10%
Here the losses were incurred at the start of the savings plan around the years 2000, 1930 and 1964.
In the past, a savings plan on the S&P 500 therefore made more sense than a one-off investment in terms of risk reduction over a 10-year investment period.
Holding period < 10 years - data
How do the figures change with a one-off investment and a holding period of 1-9 years? @Kundenservice I would like to have the option of formatting data as a table.
9 years:
- 1,026 possible investment times
- 113 (without) / 48 (with dividend) negative results
- 11% / 4.7% risk of loss
- Reduction of the risk of loss by approx. 28%
losses (incl. dividend):
- 1x between 60% and 50%
- 6x between 50% and 40%
- 12x between 40% and 30%
- 11x between 30% and 20%
- 8x between 20% and 10%
- 10x less than 10%
8 years:
- 1,038 possible investment points
- 140 (without) / 42 (with dividend) negative results
- 13.5% / 4% risk of loss
- Reduction of the risk of loss by approx. 38%
losses (incl. dividend):
- 1x between 60% and 50%
- 2x between 50% and 40%
- 7x between 40% and 30%
- 10x between 30% and 20%
- 7x between 20% and 10%
- 15x less than 10%
7 years:
- 1,050 possible investment times
- 152 (without) / 62 (with dividend) negative results
- 14.5% / 5.9% risk of loss
- Reduction of the risk of loss by approx. 9%
Losses (incl. dividend):
- 1x between 50% and 40%
- 6x between 40% and 30%
- 19x between 30% and 20%
- 14x between 20% and 10%
- 22x less than 10%
6 years:
- 1,062 possible investment dates
- 164 (without) / 91 (with dividend) negative results
- 15.4% / 8.6% risk of loss
- Increase in the risk of loss by approx. 32%
Losses (incl. dividend):
- 7x between 60% and 50%
- 8x between 50% and 40%
- 7x between 40% and 30%
- 18x between 30% and 20%
- 13x between 20% and 10%
- 38x less than 10%
5 years:
- 1,074 possible investment dates
- 223 (without) / 139 (with dividend) negative results
- 20.8% / 12.9% risk of loss
- Increase in the risk of loss by approx. 98%
Losses (incl. dividend):
- 4x between 70% and 60%
- 10x between 60% and 50%
- 15x between 50% and 40%
- 15x between 40% and 30%
- 8x between 30% and 20%
- 33x between 20% and 10%
- 54x less than 10%
4 years:
- 1,086 possible investment dates
- 246 (without) / 171 (with dividend) negative results
- 22.7% / 15.7% risk of loss
- Increase in the risk of loss by approx. 242%
Losses (incl. dividend):
- 4x between 80% and 70%
- 8x between 70% and 60%
- 10x between 60% and 50%
- 13x between 50% and 40%
- 11x between 40% and 30%
- 30x between 30% and 20%
- 40x between 20% and 10%
- 55x less than 10%
3 years:
- 1,098 possible investment points
- 242 (without) / 189 (with dividend) negative results
- 22% / 17.2% risk of loss
- Increase in the risk of loss by approx. 265%
Losses (incl. dividend):
- 1x between 90% and 80%
- 5x between 80% and 70%
- 11x between 70% and 60%
- 2x between 60% and 50%
- 4x between 50% and 40%
- 20x between 40% and 30%
- 41x between 30% and 20%
- 57x between 20% and 10%
- 48x less than 10%
2 years:
- 1,110 possible investment dates
- 266 (without) / 210 (with dividend) negative results
- 24% / 18.9% risk of loss
- Increase in the risk of loss by approx. 291%
Losses (incl. dividend):
- 3x between 80% and 70%
- 7x between 70% and 60%
- 9x between 60% and 50%
- 8x between 50% and 40%
- 27x between 40% and 30%
- 34x between 30% and 20%
- 56x between 20% and 10%
- 66x less than 10%
1 year:
- 1,122 possible investment dates
- 348 (without) / 303 (with dividend) negative results
- 31% / 27% risk of loss
- Increase in the risk of loss by approx. 415%
Losses (incl. dividend):
- 2x between 70% and 60%
- 5x between 60% and 50%
- 6x between 50% and 40%
- 21x between 40% and 30%
- 36x between 30% and 20%
- 85x between 20% and 10%
- 148x less than 10%
Holding period < 10 years - conclusion
In the past, if an amount was invested once, it made little difference to the risk of loss whether it was invested for 7, 8, 9 or 10 years. Strictly speaking, an investment period of 7-9 years even had a lower risk of loss, provided the dividend was reinvested. With an investment period of only 6 years, the risk of a loss remained at a low level in principle, but the risk of a high loss increased noticeably.
An investment period of 2-5 years already entails a significantly higher risk of loss. The amount of a possible loss also increased noticeably.
Although the maximum amount of a loss fell again slightly with an investment horizon of just 1 year, the highest probability of making a loss overall was over 25%.
If the history of the S&P 500 repeats itself, the minimum investment period can be reduced to up to 7 years for one-off investments. If you can live with the increased risk, you can also venture to invest for 6 years. A holding period of 5 years or less is not recommended or only recommended with a corresponding risk profile.
Savings plan < 10 years - data
9 years:
- 1,026 possible starting points
- 90 (without) / 34 (with dividend) negative results
- 8.8% / 3.3% risk of loss
- Increase in the risk of loss by approx. 14%
Losses (incl. dividend):
- 1x between 40% and 30%
- 4x between 30% and 20%
- 13x between 20% and 10%
- 16x less than 10%
8 years:
- 1,038 possible starting points
- 103 (without) / 46 (with dividend) negative results
- 9.9% / 4.4% risk of loss
- Increase in the risk of loss by approx. 52%
losses (incl. dividend):
- 1x between 40% and 30%
- 3x between 30% and 20%
- 16x between 20% and 10%
- 26x less than 10%
7 years:
- 1,050 possible starting points
- 131 (without) / 78 (with dividend) negative results
- 12.5% / 7.4% risk of loss
- Increase in the risk of loss by approx. 255%
losses (incl. dividend):
- 1x between 40% and 30%
- 7x between 30% and 20%
- 26x between 20% and 10%
- 44x less than 10%
6 years:
- 1,062 possible starting points
- 159 (without) / 107 (with dividend) negative results
- 15% / 10.1% risk of loss
- Increase in the risk of loss by approx. 348%
Losses (incl. dividend):
- 1x between 40% and 30%
- 15x between 30% and 20%
- 35x between 20% and 10%
- 56x less than 10%
5 years:
- 1,074 possible starting points
- 185 (without) / 123 (with dividend) negative results
- 17.2% / 11.5% risk of loss
- Increase in the risk of loss by approx. 397%
Losses (incl. dividend):
- 1x between 60% and 50%
- 3x between 50% and 40%
- 3x between 40% and 30%
- 22x between 30% and 20%
- 36x between 20% and 10%
- 58x less than 10%
4 years:
- 1,086 possible starting points
- 205 (without) / 140 (with dividend) negative results
- 18.9% / 12.9% risk of loss
- Increase in the risk of loss by approx. 445%
losses (incl. dividend):
- 1x between 80% and 70%
- 2x between 70% and 60%
- 5x between 60% and 50%
- 6x between 50% and 40%
- 7x between 40% and 30%
- 21x between 30% and 20%
- 32x between 20% and 10%
- 66x less than 10%
3 years:
- 1,098 possible starting points
- 242 (without) / 187 (with dividend) negative results
- 22% / 17% risk of loss
- Increase in the risk of loss by approx. 586%
losses (incl. dividend):
- 3x between 70% and 60%
- 3x between 60% and 50%
- 7x between 50% and 40%
- 13x between 40% and 30%
- 30x between 30% and 20%
- 40x between 20% and 10%
- 91x less than 10%
2 years:
- 1,110 possible starting points
- 287 (without) / 231 (with dividend) negative results
- 25.9% / 20.8% risk of loss
- Increase in the risk of loss by approx. 717%
Losses (incl. dividend):
- 1x between 70% and 60%
- 2x between 60% and 50%
- 7x between 50% and 40%
- 11x between 40% and 30%
- 32x between 30% and 20%
- 48x between 20% and 10%
- 130x less than 10%
1 year:
- 1,122 possible starting points
- 342 (without) / 299 (with dividend) negative results
- 30.5% / 26.6% risk of loss
- Increase in the risk of loss by approx. 917%
Losses (incl. dividend):
- 1x between 60% and 50%
- 2x between 50% and 40%
- 9x between 40% and 30%
- 19x between 30% and 20%
- 60x between 20% and 10%
- 208x less than 10%
Savings plan < 10 years - conclusion
If the savings plan only ran for 9 instead of 10 years before payout, the risk of loss increased only slightly. Even at 8 years, the risk of loss was - in my opinion - still within reasonable limits. With an investment horizon of 7, 6, 5 or 4 years, a significantly higher risk was observed. In addition, the risk of a high loss increased significantly after 5 years and less. With an investment period of 3 or 2 years, and especially 1 year, a high risk had to be accepted.
If you want to invest with a savings plan, the historical data suggests that it would be reasonable to reduce the investment horizon from 10 to 9 or even 8 years. However, the risk increases significantly with even shorter periods. Such a period should only be chosen consciously and in consideration of the individual risk profile.
Leaving the money after the end of the savings plan
Does the risk change if the money is left for another year after the end of the savings plan before it is paid out? As I don't want to torture you again with endless lists, here is the short answer: If I pay into a savings plan for one year less and leave the money lying around for a year after the last installment, the risk increases minimally.
How much do I reduce the risk of loss if I hold my investments for longer than 10 years / let the savings plan run for longer?
As you would expect, each additional year of holding reduces the risk a little. For a one-off investment, the probability of having to sell at a loss was only 1.7% after 15 years (including dividends), 0.2% after 16 years and 0% after 19 years. From an investment horizon of 12 years, the time of each loss-making one-off investment was before 1931. If we only consider the periods from 1931 onwards, the risk of loss from an investment period of 12 years was 0% for one-off investments.
The picture is similar for savings plans. Here, the probability of having to exit at a loss after 14 years was 1.9% (including dividends). After 15 years, the probability was only 0.4%. Somewhat surprisingly, the months in which the loss-making savings plans were launched were 1959 and 1994. When a savings plan was implemented, the probability of a loss was 0% after just 17 years.
But the S&P 500 is not the MSCI World!
Correct. As I wrote, I do not have sufficient historical data for the MSCI World. But at least [3] offers a look back to December 1978. If you compare the risk of the MSCI World with the S&P 500 for the years 1979 to 2022, you can see a similar risk trend - both for one-off investments and for savings plans. Even if the overall risk of the S&P 500 was slightly lower than that of the MSCI World in most of the periods under review.
Final thoughts
