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Editor's Note Investing Basics Portfolio Strategies

Two Investing Basics for National Financial Planning Month

The impact of your time horizon and your ability to tolerate volatility are key investing concepts to understand.

by Charles Rotblut | October 2026

Charles Rotblut leads a class in AAII's new Essential Investing Video Course. Go to https://www.aaii.com/ves for more information and to subscribe.

Investors get compensated for taking risks. The timing of those risks is always unknown in advance.

These two key investing concepts underlie this month’s articles from contributing editors Craig Israelsen and Paul Merriman. They are also concepts that should be emphasized now since October is National Financial Planning Month. In an age of YOLO (you only live once) attitudes toward money, blocked shipping lanes in the Middle East, rising bond yields and uncertainty around the actual impact of artificial intelligence (AI), focusing on the basics matters.

One of those basics is understanding how your time horizon impacts your decisions. Individual investors with 30 or more years before retirement benefit more from high returns. They have the time horizon to see their compounded returns greatly exceed the value of their savings contributions. This, of course, only happens if they treat investing as a marathon instead of trying to sprint to the finish line on Robinhood or Kalshi.

Individual investors with 20 or fewer years to retirement are better off saving more. Why? Because the cumulative amount of ongoing contributions is nearly equal to the returns realized. This assumes a perfect world where contributions to retirement savings increase steadily and returns are the same every year. Plus, a shorter time horizon offers less time to recover from an ill-timed drop in the market. Israelsen’s article unpacks this concept.

Another investing basic to understand is your ability to tolerate volatility and remain patient. Small-cap value stocks demonstrate why.

Small-cap value has significantly outperformed large caps over the past 100 years. That outperformance has come with more volatile returns and stretches of underperformance. Small-cap value stocks have particularly trailed large-cap stocks over the past 10 years.

To realize the small-cap value premium, an investor needs both the tolerance and the patience to stick with small-cap stocks. Paul Merriman’s article walks you through the considerations of allocating to small-cap value.

Wishing you prosperity and good health, 

Chuck Rotblut siganture image

Discussion

JOHN L from NJ posted 22 days ago:

Maybe there never was a small cap value premium? Perhaps the premium was due to the much larger bid ask spreads on small caps in the past and poor record keeping that obscured this cost.


ROBERT A from NC posted 21 days ago:

Charles, thank you SO MUCH for not substituting "risk" for volatility in this piece! One nit to pick: I don't think the "retirement" line should necessarily be the end measure of time horizon. I've been retired for almost 15 years, and my time horizon is still infinity.


BARRY J from TX posted 8 days ago:

"Small-cap value has significantly outperformed large caps over the past 100 years." #1 I compared the number of years small-caps were positive to the number of years they were not in the MEF article. The percent of "good" years versus "bad" years came out close to a 50/50 coin flip. #2 Coin flips are used in experiments to model the uncertainty of future events. #3 Craig's (and Charles') conclusion: small-caps are "good" investments for various age cohorts, and they both conclude: "To realize the small-cap value premium, an investor needs both the tolerance and the patience to stick with small-cap stocks." #4 The data say that "patience" and "tolerance" are not character strengths. They merely require the investor to be "luckier" (get more favorable coin flips) than not. They have "patience" for one more flip ("come on, "heads"). They "tolerate" the uncertainty of time. You can compare these "beliefs" to the "beliefs" of ANY sports team fanatic. #5 IN Craig's data array, there are ALTERNATING 7-13 year trends where small-caps outperformed the market, but getting 7-13 coin flips either way in a row is pure "luck," not investing "skill." Small-cap investing is for folks who are "feeling lucky today." That's a "Dirty Harry" choice. #6 When you ask someone who says they have done this for 30 years or so (or flipped a coin and got 10 heads, or who outperforms the market 10 years in a row), and you ask them, "How did you do that?, they always say, "It was investing skill." #7 It wasn't. It was luck. Investing is only a "skill" when you use a balanced portfolio. 'Balance" produces "luck." Regards


ROBERT A from NC posted 7 days ago:

Staying in a game with odds that are ultimately stacked in your favor does not make you "lucky" when you eventually win. Such a win is merely the reward for tenacity, patience, and resilience. True enough, enormous skill and intellect are not necessarily required to win such a game, but winning it does require the consistent application of positive characteristics over time. A 50/50 coin flip can provide favorable odds if the AMOUNTS received when you win are greater than the amounts paid when you lose.


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