James d. Gwartney

Exhibit 25: Stocks Are Less Risky When Held for a Lengthy
Period of Time
-40.8%
-16.7%
-1.1%
13.8%
29.8%
47.2%
50%
-50%
40%
-40%
30%
-30%
20%
-20%
10%
-10%
0%
9.5%
2.7%
1-year period
5-year period
20-year period
35-year period
Best annualized real performance
Worst annualized real performance
S&P 500 Index-Annualized Real T
otal Return,
1871-2015 (percent)
Source: Liqun Liu, Andrew J. Rettenmaier, and Zijun Wang, “Social Security and Market Risk,” National Center for
Policy Analysis Working Paper Number 244 (July 2001). The returns are based on the assumption that an individual
invests a fixed amount for each year in the investment period. Data are updated through 2015.
However, note how the “best returns” and “worst returns” converge as the length of the
investment period increases. When a thirty-five-year period is considered, the compound
annual return for the best thirty-five years between 1871 and 2014 was 9.5 percent, compared
to 2.7 percent for the worst thirty-five years. Thus, the annual real return of stocks during the
worst-case scenario was about the same as the real return for bonds. This high and relatively
stable long-term return makes stocks a particularly attractive method of saving for retirement.

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The same pattern of variance in gains falling as time passes can be seen in the markets
of almost every free country. (This may not apply when a country’s economic policies are
controlled by a non-democratic government whose values do not place a great deal of weight
on citizens’ well-being).
Here is the most important takeaway from this element: Do not allow a lack of time and
expertise to keep you out of equity investments. You do not have to do a lot of research or be a
“super stock picker” in order to be a successful investor. Regular contributions into an indexed
equity mutual fund will provide you with attractive returns on long-term investments with
minimal risk. For most, these investments will be an important ingredient of a sound retirement
plan. Every large reputable investment firm will have several indexed equity mutual funds
from which to choose. Each firm may have a slightly different name for its fund, so be sure to
read the description to determine the one that best fits your needs.

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