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Newsletter

2008 1st Edition (Other Editions)

HOW TIME LIMITS RISKS

The table presented below classifies total returns on stocks in the Standard & Poor's 500 Index according to length of holding period and clearly demonstrates how time limits risks associated with volatility in stock prices. The data also shows that longer-term returns are satisfactory and commensurate with risk, but are not compatible with a get rich quick approach.

• Returns are volatile on a diversified portfolio of stocks held for one year. Very high returns occur only over short holding periods. Since 1926, returns have ranged from +54.0 percent in 1933 to -43.3 percent in 1931, and losses accrued in nearly one third of the years.
• Investors who held a diversified portfolio of stocks for five years have experienced about a 1 in 7 (14% from chart 7% and 3.5% and 3.5%) chance of experiencing a loss. The odds were about 1 in 20 when the holding period is 10 years. Losses disappeared almost completely over 10 year holding periods, and completely when the holding period was as long as 25 years.
• As the holding period was extended, the total return naturally approximated the arithmetic annual average return of 12.0 percent for a thirty-year period, including capital gains and dividends.

Source: Ibbotson, Roger C., and Rex A. Sinquefield, Stocks, Bonds, Bills and Inflation (SBBI)