Investing 8 Year Time 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 8 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/2.36%/43.59%/100%
Large Stocks/1.85%/22.75%/100%
Long Bonds/-0.11%/15.34%/99%
Short Bonds/-0.22%/10.19%/94%

Time Period 1940-1999

Investment/Min Return/Max Return/% Positive Return
Small Stocks/2.36%/36.64%/100%
Large Stocks/2.88%/22.75%/100%
Long Bonds/-0.11%/15.34%/98%
Short Bonds/0.23%/10.19%/100%

What conclusions can we draw from this data:

1. Things have changed with stocks having better minimum returns, maximum returns, and % positive returns than bonds.
2. The data during 1926 - 1999 looks a little wierd as the % positive return for short term bonds is the lowest.
3. Bottom Line: If you can handle the ups and downs, keeping your focus on the long term, stocks outperform bonds in all categories. Buy stocks rather than bonds.

If you have a child going to college in 8 years you should be looking at mutual funds that contain large cap and small cap stocks.