Overview: We have never bought into the conventional wisdom that investing in stocks is not risky over the long term. This commentary discusses our stance on the long-term risk of equities and a recent study’s findings on the riskiness of stocks over the long term.

On March 29, The New York Times published an article called “Now the Long Run Looks Riskier, Too” which discusses a 2008 academic study that found equity risk to be uncertain, regardless of the time horizon. The authors of the study make this conclusion by using a new approach involving Bayesian analysis. While we (and various academics) have pointed out long before this study and its new approach that stocks are risky for all time horizons, the conclusion goes against “conventional wisdom” that stocks are not risky if your time horizon is long enough. That conventional wisdom was made popular by Jeremy Siegel when he published his book Stocks for the Long Run in 1994.

 

But we have continuously held the belief that stocks are always risky and that total expected return has an increasing variance over time. In fact, for the period 1966–1990 riskless one-month bank CDs outperformed large-cap growth stocks. We haven't bought into the conventional wisdom and have continuously provided education about the long-term risks of stocks.

 

Finally, another way to view the long-term risk of equities is by asking a series of questions Larry Swedroe likes to pose to new advisors and prospects:

 

These questions and answers hold true no matter how long your time horizon might be. In other words, if holding stocks for a long period was guaranteed to outperform Treasuries, there would be no risk and therefore no higher expected return.