What “the long term” means
Compounding means earning returns on returns: today’s gain earns its own gain next year. The arithmetic is in a separate lesson. The point here is that compounding is very slow at first and speeds up as time passes. The first few years look unimpressive; most of the growth comes towards the end.
In investing, “the long term” usually means at least five to ten years or more, especially for assets that swing, like shares. Over one or two years the market can go either way; over long periods the real growth of businesses has more effect on prices.
Say Rina invests Tk 2,000 a month from age 25 for ten years, then never adds another taka. Her friend Rafi starts at 35 with the same Tk 2,000 a month and keeps going until 60. At an assumed 8% a year, at 60 Rina has about Tk 26.9 lakh (having put in Tk 2.4 lakh) and Rafi about Tk 19 lakh (having put in Tk 6 lakh). Rina’s ten-year head start beats Rafi putting in two and a half times as much. The numbers are only an example.
Why it matters to an investor
- To see the value of starting early: even small amounts started early let time work for you. Starting late means saving far more to catch up.
- To stay patient: most of compounding’s reward comes in the later years. Stopping halfway or withdrawing again and again throws that part away.
- To see ups and downs in proportion: one bad year is often just a step on a long road, as long as you don’t need that money soon.
Time in the market versus timing the market
Many people think they will get out before a fall and back in before a rise. It sounds easy but is very hard in practice, because the market’s best days often come close to its worst days. People who get out in fear often miss exactly those good days.
A 2024 analysis by a large US fund firm found that missing the US stock market’s 10 best days over roughly the previous 20 years would have cut the final value by about half. And 7 of those 10 best days came within two weeks of the 10 worst days.
Ups and downs smooth out with time
Bangladesh’s own stock market shows how different single years can be. The DSE’s main index, the DSEX, fell about 13.8% in 2018 and about 17.3% in 2019, then rose about 21.3% in 2020. Someone who sold in despair at the end of 2019 missed the following year’s rise.
- Time does not remove risk: a market can do badly even over long periods, and a single company can fail completely. That is why diversification matters alongside the long term.
- Money you need soon is not long-term money: keep next year’s spending in an asset that swings and you may have to sell right in the middle of a fall.
Source: The Business Standard, 30 December 2020
See the numbers as a table
| Change in the year | |
|---|---|
| 2018 | -13.8% |
| 2019 | -17.3% |
| 2020 | 21.3% |
Worked example
- Say you invest Tk 1,00,000 once, at an assumed average return of 10% a year.
- After 10 years: about Tk 2,59,000. Growth in the first decade: about Tk 1,59,000.
- After 20 years: about Tk 6,73,000. Growth in the second decade: about Tk 4,14,000.
- After 30 years: about Tk 17,45,000. Growth in the third decade: about Tk 10,72,000.
Result: same money, same rate, yet growth in the third decade is about seven times the first. In real life returns are not the same every year, and tax, costs and inflation are left out here. The numbers are only an example.
Common mistakes
- Waiting year after year “until I have more money”. Starting small and early often beats starting big and late.
- Selling everything in fear during a big fall, then coming back after the market has recovered.
- Treating the long term as a guarantee that you can’t lose. Time helps reduce risk; it does not remove it.
- Putting money you will need soon into long-term assets that swing.
Time is compounding’s biggest ingredient: start early, keep only money you won’t need soon in long-term investments, and be patient through the ups and downs.