Is VTSAX Only a Good Choice for Very Long Term Investing?

[Southeast]

Regarding the book The Simple Path to Wealth, I have a question about investing in VTSAX, especially for those who don't intend (or can't) let it sit for an extended period of time, such as over ten years.

It's been unbelievable for the past nine-plus years. But if I look at November of 2000 it was at 30.56 and in December of 2010 it was at 30.52. Isn't that ten years of absolutely nothing? Of course if you had invested in 2000 and kept it in until now you would be thrilled.

I'm new to all of this, so my question is, why would anyone who doesn't have a lot of time to let it sit there invest in it at all? If it's ten years or less it seems like a total crapshoot and you'd just be hoping for the best rather than having the security of the truly long haul.

Thanks for any input (Apologies if this has been covered at length before)

[PoutineLover]

You can cherry pick any two points to show that it hasn't grown, but zoom out and the long term trend is growth. You shouldn't be invested solely in equities for short timelines, as you can expect a lot of volatility. Your asset allocation should reflect your goals and timeline, so if you need the money for sure in under ten years, consider holding more bonds, using high interest savings accounts, and/or CDs depending on your risk tolerance and growth expectations.

[ditheca]

If you cherry pick the worst years, then yes... it looks not-amazing.  Don't forget the dividends paid over those 10 years; share price isn't everything.

It would be a rare investor who dropped their entire net worth into VTSAX on November 2000.  If you were investing monthly, the volatility of the market has a lower impact.  You'd have also bought some in Feb 2009, which has quadrupled since that time. (Not counting dividends!)

[nereo]

I find this analysis of real positive returns over various time periods to be very applicable to your question:


Source: Morgan Housel

quick analysis: the longer you can hold a fund like VTSAX, the more likely you will experience a positive return after inflation.  Periods > 2 years have had positive returns more than 75% of the time. At 10 years (the OP's timeframe) you'd get positive returns 88% of the time.
So where is the 'sweet-spot'?  Depends on the investor and his/her risk tolerance and need for the money.  If you absolutely need that money to pay for something in 2 years the market may be too risk (a ~26% chance you'll lose money).  But if you have some flexibility or have a longer time-frame it rapidly shifts to 'hold it in the market'.  Personally, if it's more than 3 years it's a no-brainer to me, I put it in the market.  But I've never been in a situation where I absolutely depend on that money either and have no other sources to draw from (like my paycheck)

[Fiery Eclipse]

There's no guarantee of anything really.  If you have money you can put in VTSAX for 10 years, historically at least you are far more likely to come out ahead than lose money.

You might like https://dqydj.com/sp-500-historical-return-calculator if you like numbers.  It's how I generated the  numbers below.

Length of Investment:   2 Years   4 Years   7 Years   10 Years Average Return   7.665 %   7.180 %   6.946 %   6.768 % Median Return   7.308 %   7.254 %   6.774 %   6.716 % Maximum Return   54.232 %   38.851 %   25.356 %   19.958 % Minimum Return   -43.645 %   -20.738 %   -7.466 %   -5.925 % Standard Deviation   13.225 %   9.015 %   6.305 %   5.124 %

The market does seem iffy at this point, and a lot of people are advocating caution, but I think Mr. Collins would likely just say ignore the news and use VTSAX, no matter what the time frame. 

I know first hand that's easier said than done, but it's something to strive for.

[Southeast]

Thank you Poutine, ditheca, nereo, and Eclipse for those detailed, insightful replies and data.

[Eric]

Great chart @nereo!  I haven't seen that one before.

[Scortius]

As stated above, not a single person is going to hold an investment for a single 10 year period. In fact, in some ways by continuously investing during your career, you're basically investing in ALL of the 10 year periods, giving you even more diversification. Plus, you have the benefit that if you do run into an early 10 year period of poor returns, you'll likely extend that particular period to a 20 year return. On the other hand, if you hit a late 10 year period of poor returns, it won't have as strong of an effect given that your earlier investments have already had time to compound.

[BicycleB]

For short periods such as 1 to 5 years, there's certainly a risk of ending up with less than you started with. Whether you should take that risk depends, though.

For example, if you have $15,000 in bank savings,and $10,000 of it is earmarked for your house down payment in case you buy a house a couple years from now, maybe you just put it in a CD or i-bond, or a Treasury bond fund. But maybe you're saving $1000/month toward the down payment anyway from your very steady job (say govt job), so you put the 10k into VTSAX. If VTSAX drops 30% one year from now, with no rebound, your $10,000 became $7,000. You can still buy the house, probably, so the loss doesn't change your plans - you still have 31,000 for your down payment. If you really need $34,000 instead of 31,000 you would work 3 more months and still succeed. Unstoppable!

The point is, risks are manageable. You have to decide which risks to take.

I usually look at timelines of a few months, a year, 2 years, and 5 to 10 years. For each, I have some modest plan to make reasonably sure of having enough cash to pay my expenses. Sometimes part of the plan is "I need $10,000 by date X...ok, I have $20,000 of stock in the account that is accessible by date X, I can handle anything up to 50% decline." Usually I feel safe at that point  even if very little is in cash.

In fairness, I keep 1 to 3 months in bank savings almost no matter what. Beyond that, it depends.

[soccerluvof4]

I agree that you need to come up with a different plan if you have no intentions of keeping the money in there for ten years. You weren't specific as to why or if you are talking about all your money etc.

But if you for sure are not going to invest it long term then why invest it in a long term index. As others mentioned you probably would be better laddering CD's, using High Interest account , bonds etc.. Maybe more specifics and people could be of more help.

I think @nereo chart shows the value of long term with VTSAX which is why based on Historical returns only so many of us long term investors go into that fund.

[light switch]

I may be unqualified to reply here, but it's my understanding that while you may not see some amazing amount of growth after ten years of being invested, this would not be the end.  After all, you probably won't be withdrawing all the money you've invested and keeping it in cash, after the ten year mark.  SO you spend ten years investing in VTSAX, then you start making small withdrawals, using the 4% rule I suppose.  You still have a lot more money than your 4%, which will continue to grow in perpetuity, or until you've exhausted it.  Which means your timeline isn't 10 years to realize all the gains possible.  Your timeline becomes 10 years PLUS however long it takes you to exhaust the assets you invested, plus dividends.