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What is the long term? Fellow previous podcast guest and author of this article, Bob French, writes that the “long term” is defined by the amount of time it takes a Random Walk to form an assertive trend. Stocks and bonds come with their own “risk premium” to investors, and the riskier an asset is, “the stronger the trend in the Random Walk”. To see that trend in a Random Walk assert itself, you have to stick around for the long run.
The data: To put the “long run” in context, Bob French analyzed a range of S&P 500 returns from 1926 to 2022 (as shown in the article graph). In year one, the difference between the best and worst return was an astounding 230 percent. Over time, however, the Random Walk shows its colors. While longer periods still contain the “craziness of shorter periods”, they benefit from additional time to balance out.
Two questions answered: All this being said, there are two questions investors want to know: 1) How long do you need to be invested to be “sure” you don’t lose money? And 2) How long do you need to be invested to be “sure” you do better than an alternative investment? French researched both. For the first, once the S&P 500 reached a holding period of at least 20 years, there was an index loss of zero. For the second, the S&P 500 had a 100 percent chance of beating the alternative (5 Year U.S. Treasury Notes) by year 30.
Long term is personal: It’s something you must define for yourself, and in my opinion, should be a minimum of 10 years when it comes to the stock market. For you, however, it could mean 20 years or more.