As retail investors, I'm sure this question comes up more often than not in our minds. We made a particular investment at a bad timing somehow, and we start to wonder how long we will need to recover from this "bad" investment. Do we now hold it for eternity or should we just exit the position and take a loss?
In this article, I'm going to explore these "bad" investments in different asset classes and find an answer to the right duration we should all be looking at to recover from these "bad" investments.
First, let's talk about equities- probably the most common asset class that most of us are investing in. To simplify things, we are not going to talk about individual stocks as I'm sure most of us probably realise that there are always going to be some stocks which will never recover and hence we will probably not arrive at any meaningful conclusion. Instead, we will focus on the index.
Many of us can probably still remember the dot-com bust which happened in 2000 and resulted in sub-par performance of NASDAQ for a relatively long period of time. What happens if you were to be extremely bad at timing the market and make a lump sum investment right before the dot-com bust? How long will you take to recover?
Here's a good visual showing you the rolling realised returns of QQQ over different time periods. The red bars represent the worst scenario. The blue bars represent the best scenario. The circles with orange outline represent the average scenario.
The longest red bar happens when your holding period is only 1 year with entry point in October 2000 and exit point in September 2021. In this case, you will lose a good 67.35% loss in the investment. While that might sound like a really horrible investment, I think there are two very positive conclusions we can draw from this visual. Firstly, the annualised returns for all different kinds of holding periods are in the positive region. This goes to show that there is a very good chance your investment will result in positive returns even when you think you are making a bad investment. And secondly, even if you do indeed make very bad investments (like what you see in the worst scenarios represented by the red bars), the chances of you making less losses increases as your holding period goes longer. When your holding period is 15 years, even the worst scenario is still a positive annualised return.
Hence, you now know why you often hear many investing experts say that the investment risks significantly reduce when you have a long holding period. So if you are buying indices, always remember to do so with a long investment horizon. (By the way, do check out the super-app of the investing world here. There's a really good promotion going around now!)
Secondly, let's explore cryptocurrency- an upcoming asset class which is certainly popular with millennials. Similar to what we have done for equities, we are not going to talk about individual cryptocurrencies due to the exact same reason- some cryptocurrencies will never recover. Since there is no index for cryptocurrency, let's use bitcoin instead.
We often hear many people saying that bitcoin is speculative and not worth investing in. Your investment can go to zero and you will end up losing everything. Is that really true?
Check this out.
This is an absolutely good visual tool which I strongly recommend to anyone who's interested in Bitcoin to check out the website. You are able to see clearly the profit/loss for different time periods throughout the history of Bitcoin. What's important in this visual is the hodl line. This hodl line represents the maximum time period for anyone to recover from a drawdown in their investment in bitcoin. As it currently stands, nobody has ever lost money investing in Bitcoin by holding it for at least 3 years, 4 months and 4 days throughout the history of Bitcoin. To be honest, I'm absolutely impressed with this short time period. The next time anyone tells you that Bitcoin is a high risk investment where you can lost all your money, please show them this chart (and of course also introduce www.datascienceinvestor.com)
Now, the last asset class I'm going to talk about today will be properties. There's a few ways where one can invest in properties. You can either buy an actual property or you can invest in REITs. For the comparison sake in this article, I'm going to focus on the former as this is still the most common way Singaporeans invest for real estate. We either buy a BTO, resale or condominium for such real estate investments. Again, you often hear many people saying that buying properties is a good way to preserve wealth and probably also the least risky way of investment? Is that really true?
Here are some transaction records for a particular private property development in Sentosa Cove.
You can see from these records examples of cases where people hold a particular property for 12 years or so and yet still incur losses and that's not counting any stamp duties, legal fees etc. I know some might be saying that I'm cherry picking here by only selecting a particular property. But I can assure you that non profitable transactions in properties happen more often than you think, especially for private properties. So if you think investing in properties is the safest and nobody makes a loss in investing in properties if they hold long enough, think again.
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