Investing 2 Year Horizon

It is good to know the performance over a 74 year period or 60 year period or a 10 year period. How do you invest if you have a 2 year time horizon? To answer the question, we will look at the minimum return, maximum return, and percentage of time for a positive return for a Small Cap Stock Index, Large Cap Stock Index, Long Term Bonds, and Short Term Bonds in the book Investments.

We will look at the time period from 1926 - 1999, to include the Great Depression and 1940-1999 to reflect a more normal period. It depends if you want a true worst case or a more normal environment.

Time Period 1926 - 1999

Investment/Min Return/Max Return/% Positive Return
Small Stocks/-48.25%/106.48%/78%
Large Stocks/-35.73%/42.00%/84%
Long Bonds/-4.31%/28.32%/88%
Short Bonds/-1.27%/13.26%/96%

Time Period 1940-1999

Investment/Min Return/Max Return/% Positive Return
Small Stocks/-35.14%/80.16%/83%
Large Stocks/-20.58%/42.00%/90%
Long Bonds/-4.31%/28.32%/85%
Short Bonds/0.03%/13.26%/100%

What conclusions can we draw from this data:

1. Comparing a 2 year time horizon to a 1 year time horizon, all of the minimum returns improved, all of the max returns reduced and all of the % positive returns improved except for short term bonds during 1926 - 1999. A longer timer horizon is good for a riskier investment when looking at the minimum return and % positive returns.
2. The minimum return data shows that short term bonds did the best. Small stocks which gave the best long term performance had the worst numbers. Bonds had lower negative numbers indicating that they provided more stability. Stocks that give the best long term performance had less stability.
3. The maximum return data shows that stocks outperform bonds by a very wide margin. Small stocks that had the most negative minimum return value has the largest maximum value indicating the most volatility.
4. The percentage of time that a positive return was achieved shows the investments had about the same value during both time periods. Short term bonds had the highest value and got to 100% during the 1940-1999 period. What is interesting and somewhat surprising is that small stocks, large stocks, and long bonds are similar and about 4/5ths to 9/10ths of the time have a positive return.
5. If you are concerned about losing money on your investment, a short term bond is the right answer, as it has the highest minimum return value and highest percent positive return.
6. If you are investing in small stocks, large stocks, and long term bonds it is possible to lose money about 1/10th to 1/5th of the time. The size of the loss is the least with long term bonds.
7. If you are an aggressive investor that only has a focus on the maximum gain stocks outperformed bonds by a wide margin.
8. Bottom Line: Stocks had the greatest potential for growth and the greatest risk in the amount of loss. Bonds had the least potential for growth and provided better stability.

If you have a child going to college in 2 years and you are invested only in mutual funds that contain stocks, you need to consider selling some and invest in short term bonds or a money market account to have some stability. Remember that the tuition payment is due when the tuition payment is due, regardless of what happens in the stock market.