This excerpt from the new edition of Charles Ellis’s classic Winning the Loser’s Game is guaranteed to motivate you to start working on that long-term financial plan you’ve been putting off (see SMI’s February cover article, An Exciting New Opportunity for SMI Members: Personal Financial Planning via MoneyGuidePro® to discover an easy way to start that process).
 
While this article is a bit more advanced than our typical fare, we think you’ll find it worth the effort. The crucial points about investing for retirement that Ellis makes are provocative and challenging.
 

Time is Archimedes’s lever in investing. Archimedes is often quoted as saying, “Give me a lever long enough and a place to stand, and I can move the earth.” In investing, that lever is time (and the place to stand, of course, is on a firm and realistic investment policy).

Time — the length of time investments will be held, the period over which investment results can be measured and judged — is crucial to any successful investment program because it is the key to getting the right asset mix.

If time is short, the highest-return investments — the ones a long-term investor naturally most wants to own — will not be desirable, and a wise short-term investor will avoid them. But if the time period for investing is abundantly long, a wise investor can commit without great anxiety to investments that in the short run would appear to be too risky.

Given enough time, investments that might otherwise seem unattractive become highly desirable. Time transforms investments from least attractive to most attractive — and vice versa — because while the average expected rate of return is not at all affected by time, the range or distribution of actual returns around the expected average is greatly affected. The longer the time period over which investments are held, the closer the actual returns in a portfolio will come to the expected average.

As a result, time changes the ways in which portfolios of different kinds of investments can best be used by different investors in different situations and objectives.

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