Stock Markets Got You Stressed? Here’s A Calming Chart For You

I don’t do market predictions, but I wanted to keep some things in perspective. In the most recent edition of A Random Walk Down Wall Street, there is an updated version of a chart which I have used before to show how important time horizon is to reducing your projected risk. I have replicated it below:


The fact that the variability in returns decreases the longer one stays in the market is very encouraging news for the long-term investor. But it is critical to remember that this data assumes you buy and hold a diversified portfolio. If you buy or sell stocks based on fear or hype, all bets are off.


  1. I started my roth IRA this year and as a novice, I am shocked at how volatile the stock market has been. I’ve lost a lot of money but I remain optimistic and I actually called T.Rowe Price to open a new index that will diversify my portfolio even further and I will be doing some re-balancing of my funds as well.
    How well have some of you rebounded from the 2000 crash? How many panicked?

  2. I think you’re starting out a lot better than I did. I first bought Janus Mercury, a hot mutual fund with lots of Morningstar Stars in 2001-2002. It did not do well 🙂

    But after starting this blog and reading a lot more about investing, I now I take a much longer view of the market as I realize that predicting the short term is beyond my abilities.

  3. This is a great chart which puts everything in perspective – thanks for posting it.

    The Dividend Guy

  4. Jonathan,
    Great post! I am a long term investor, but I have recently begun tracking my net worth monthly as I am pondering paying off my mortgage for my 40th birthday present in January. My 401K has dropped significantly in the past few weeks and it would be very easy to get depressed about it if I weren’t in it for the long haul. I get paid next week, and I’m actually looking forward to this month’s 401K contribution being made at bargain prices.

    Keep up the great work on your blog!

  5. Very interesting chart that helps put things into perspective in a time like this. It is amazing the number of blogs who are running with the bears now and acting like the market will come to an end soon. Nice perspective in chart form. Great blog, very interesting and an enjoyable read!

  6. That is a comforting graph. What stock allocation is that covering? Only U.S.? International too?

    Jon, this could be a new business venture: counseling for investors in panic mode.

  7. That’s a very interesting chart. It’s amazing how it seems to be monotonically converging to around 10%. That’s a pretty high number. If it continues to converge out to around 40 or 50 years then it becomes a sure bet that if you invest heavily when you are young you will earn 10%.

  8. How are the bands determined? One standard deviation? Two? Please explain – it’s makes all the difference … thanks!

  9. That’s a very deceiving graph and can be taken the wrong way. Risk is a relative thing and it depends on what risk you are talking about. Imagine if you are one year from retirement and that last year behaves like the bottom of the left most bar – a loss of 26.5% “Buy and hold” is obviously good but you also need to reduce your portfolio risk by shifting to bonds/notes as approach withdrawal time.


  10. Ted Valentine says:

    Scott I don’t think that chart is showing a standard deviation. I think you are seeing the range of all the average annual returns possible for every 1, 5, 10, 20, and 25 year period from 1950 to 2005.

    E.g., for the 5-year bar you have all the range of average annual returns from 1950-1955, 1951-1956, 1952-1957, etc etc etc all the way up to 2000-2005.

  11. Wes, I agree with your statement. It is all about your age and perspective.

    This is a question open for everybody: what do you think about buying a 30-year Treasury bond? Are there more pros and less cons. My grandparents were big believers in bonds and gave them out to their children. Is this a good alternative? Jonathan, any thoughts?

  12. Jonathan,
    A big caveat in all this is next 100 years may not be same as the last 100 years. US became a dominant world power after WW2. Who knows how long our economic supremacy will last. Even the long view of the stock market only comprises of the rosiest of the times for USA.

  13. enonymous says:

    I like the point that you are making, and I especially like the graphical depiction. On the other hand, the results are not quite as rosy if the data goes back to 1900, in which case we have to include the crushing 5 year period from 1929-1934 when (depending on the measuring index), US equities lost 70-80% of their value. Of course, this was followed by an impressive bull market (which began in 1932 actually), and should be further reminder that the only way to achieve excellent long term returns is to stick to your target allocation strategy, even (more so) when the going gets tough. Those who bailed out at the market bottom in 1929, or moved heavily into safe havens such as bonds, got slaughtered even worse. But, the graph above is much more kind in that it leaves out the Great Depression stock market crash (1950 onwards has had a few bumps, but has generally been devoid of particularly long crushing market declines).

  14. Always trust in the long term 🙂

  15. “Scott I don?t think that chart is showing a standard deviation. I think you are seeing the range of all the average annual returns possible for every 1, 5, 10, 20, and 25 year period from 1950 to 2005.

    E.g., for the 5-year bar you have all the range of average annual returns from 1950-1955, 1951-1956, 1952-1957, etc etc etc all the way up to 2000-2005.”

    Yes, these are the actual complete ranges of returns for the time periods. In other words, if you had money in the market for any 25-year period between 1950-2005, you would have made at least an annualized 7.9% on your money.

    I’m not saying we’ll do exactly as well in the future, but only to suggest that as your time horizon lengthens, you range of returns will narrow. The major swings go away, and there is no need for antacids for weeks like this 🙂

  16. Jonathan,
    Here is what Ben Stein had to say on the recent market crisis.
    He explains the long term concept in a nice way

  17. yeah..I’m a long term investor. I don’t worry about the latest drop.

  18. This data would be more interesting if it also provided the standard deviation in the returns for each time period provided. Even though 7.9% and 17.2% are both positive, they mean dramatically different results for the investor who gets a 17.2% return for 25 years versus the investor who earns only 7.9%. Standard deviation of the returns is a risk metric worth looking into more closely.

    J. Siegel’s book “Stocks for the Long Run” shows that not only does the real, post-inflation average return of the general stock market out-perform that of bonds for long period (>7 years), but the standard deviation goes is tighter–i.e. less risk and volatility.

    Jonathan C

  19. The variation in annualized returns goes down, but the variation in TOTAL returns, which is what we actually care about, goes UP. Stocks are riskier the longer you hold them in the sense that your total return will have a wider range of possibilities.

Speak Your Mind