Weekend Reading: Do Stocks Get Safer The Longer You Own Them?
This article appears as part of Casey Weade's Weekend Reading for Retirees series. Every Friday, Casey highlights four hand-picked articles on trending retirement topics and delivers them straight to your email inbox. Get on the list here.
The answer to this article title begins with what “long term” means to you. Financial markets are capable of random, chaotic changes (AKA short-term volatility), and the S&P 500 in particular has seen significant daily fluctuations despite an overall increase year-to-date.
READ THE ARTICLERunning the numbers: While time diversification is a key factor to safeguarding investments, underlying risk still exists. Here, past podcast guest Bob French runs a Monte Carlo Analysis to simulate different investment scenarios over 50 years, assuming an 8 percent average annual return and a 10 percent standard deviation. In this scenario, the annualized returns become uniform over time, but the total returns (actual dollar values) between the 75th and 25th percentiles widen, challenging the idea that stocks become safer with a longer holding period.
The psychological benefit: As Bob states, learning to maintain a level of discipline and focusing on the “long term” are crucial aspects for successful retirement planning; not because market investing necessarily becomes safer over time, but because it helps you navigate through market noise and concentrate on your bottom line.
The stock market will never be “safe”, and while this is important to recognize, it doesn’t mean it still can’t be a valuable tool for you in retirement. Always have a plan for the best and be prepared for the worst.