A random Walk Down Wall Street: The Time-Tested Strategy for Successful Investing

2. Your Actual Risk in Stock and
Bond Investing Depends on the
Length of Time You Hold Your
Investment
Your “staying power,” the length of time you hold on to
your investment, plays a critical role in the actual risk you
assume from any investment decision. Thus, your stage in the
life cycle is a critical element in determining the allocation of
your assets. Let’s see why the length of your holding period
is so important in determining your capacity for risk.
We saw in the preceding table that long-term government
bonds have provided an average 5.4 percent annual rate of
return over an eighty-three-year period. The risk index,
however, showed that in any single year this rate could stray
far from the yearly average. Indeed, in many individual years,
it was actually negative. Early in the first decade of the
2000s, you could invest in a 5¼ percent, twenty-year U.S.

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Treasury bond, and if you held it for exactly twenty years
you would earn exactly 5¼ percent. The rub is that if you
found that you had to sell it a year later, your rate of return
could be 20 percent, 0 percent, or even a substantial loss if
interest rates rose sharply, with existing bond prices falling to
adjust to the new higher interest rates. I think you can see
why your age and the likelihood that you can stay with your
investment program can determine the amount of risk
involved in any specific investment program.
What about investing in common stocks? Could it be that
the risk of investing in stocks also decreases with the length
of time they are held? The answer is a qualified yes. A
substantial amount (but not all) of the risk of common-stock
investment can be eliminated by adopting a program of long-
term ownership and sticking to it through thick and thin (the
buy-and-hold strategy discussed in earlier chapters).
The figure 
Range of Annual Return Rates on Common
Stocks for Various Time Periods, 1950–2009
is worth a
thousand words, so I can be brief in my explanation. Note
that if you held a diversified stock portfolio (such as the
Standard & Poor’s 500-Stock Index) during the period from
1950 through 2009, you would have earned, on average, a

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quite generous return of about 10 percent. But the range of
outcomes is certainly far too wide for an investor who has
trouble sleeping at night. In one year, the rate of return from a
typical stock portfolio was more than 52 percent, whereas in
another year it was negative by 37 percent. Clearly, there is
no dependability of earning an adequate rate of return in any
single year. A one-year U.S. Treasury security or a one-year
government-guaranteed certificate of deposit is the
investment for those who need the money next year.
But note how the picture changes if you hold on to your
common-stock investments for twenty-five years. Although
there is some variability in the return achieved, depending on
the exact twenty-five-year period in question, that variability
is not reduced by only about three percentage points if you
happened to invest during the worst twenty-five-year period
since 1950. It is this fundamental truth that makes a life-cycle
view of investing so important. 
The longer the time period
over which you can hold on to your investments, the greater
should be the share of common stocks in your portfolio.
In
general, you are reasonably sure of earning the generous rates
of return available from common stocks only if you can hold
them for relatively long periods of time.
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