An article in The Wall Street Journal (2-11-92) made the following statements:

The case for investing in stocks is based not on the market’s short-term prospects, but on the superior returns that investors are likely to earn if they hold stocks for five years or longer.

How much should investors have in stocks? A lot depends on how much risk an investor can tolerate, but many investment advisers say the more people put into stocks, the better.

[F]or people who are heavily invested in stocks, there is really only one cure for the market’s volatility, and that is time.

Although we agree with the basic concepts expressed in these statements, we think the two following modifications are appropriate:

· It is not necessarily true that “the more people put into stocks, the better.” The percentage of financial assets that an investor puts into common stocks should be determined by several factors, including the investor’s time horizon.

· The time horizon to consider for investing in common stocks should be significantly more than five years – at least 10 years and, perhaps, 15 years or more.

Although it is generally accepted that common stocks outperform bonds over periods of several years and that common stocks are a good hedge against inflation, there are definitely exceptions to the validity of these beliefs, especially for periods of less than 10 to 15 years.

For example, during each of the five-year periods ending in 1973 through 1978, high-grade corporate bonds outperformed the Standard & Poor’s 500 stock index. And, during the same five-year periods, the total returns of the S&P 500 stock index were below the rates of inflation. This is not only a good reason to have a time horizon of at least 10 years – and preferably 15 years or more – when investing in common stocks, it is also a good reason to diversify into investments in addition to common stocks, at least for shorter periods of time.

There is ample evidence that even 10 years is not a long enough time horizon for investing in common stocks.  According to The Wall Street Journal (1-13-97), an investment in the Standard & Poor’s 500 Stock Index in 1965 lost an average of 4.25% annually during the next 10 years, after adjusting for inflation.  A similar investment made in 1972 had an average annual loss of 3.75% during the subsequent decade.  And, for the 10-year period that ended in mid-2008, the S&P 500 Stock Index had an annualized average gain of only 0.63%, according to another Wall Street Journal article (7-12-08).

On the other hand, during the more than 17 years that began in the second half of 1982 and ended early in the year 2000, stock investors experienced the longest and most profitable bull market in U.S. history, with stock market indexes multiplying to 10-15 times what they were at the beginning of the period.

Even during 1928-1958, which included the Great Depression and was the worst 30-year period for stocks since 1925, the stocks in the Standard & Poor’s 500-stock index increased by slightly less than 8.5% a year to about 11 ½ times what they were in 1928, according to The Wall Street Journal (8-19-97).

Typically, annual returns from common stocks have averaged about 10% or slightly higher over the long-term. However, to earn a 10% average annual return may require a commitment of almost 20 years, as was necessary during the 19 years that ended in mid-2008.

If an average annual return of about 10% does not seem very impressive, consider this: According to The Wall Street Journal (9-30-96), the value of $100 invested in the Dow Jones Industrials in 1900 would have grown to more than $61 million by mid-1996.

When the outlook for the next several months is uncertain or negative, there may seem to be justification to sell common stocks, rather than continue to hold them for the long term, but this could be a serious mistake.  In this regard, an article in The Wall Street Journal (4-28-98) warned,

If you jump in and out of stocks in an effort to catch bull markets and sidestep market declines, you run the risk of being out of the market when stocks are bulldozing ahead. That is a real danger, because big stock-market gains are often concentrated in a few weeks or even days.

Another Wall Street Journal article (1-6-00) added the following perspective: “Investors in U.S. stocks who were out of the market for the best 1.2% of all trading days from 1963 through 1993 missed 95% of the market’s gains. . . .”

However, when the long-term outlook for stock investments is uncertain or negative, it may be wise to depend less on stocks and depend more on other types of investments.

An article in The Wall Street Journal (7-3-05) cautioned,

[S]tock returns are likely to be modest in the years ahead. We may get gains of just 7% or 8% a year, well below the 79-year average of 10.4% [for the period ending in mid-2005].

Over the . . . eight decades [ending in mid-2005], stocks received a big boost from both dividends, which contributed more than four percentage points a year to the market’s total return, and from the long-run rise in the market’s price-earnings multiple, which bolstered annual performance by more than a percentage point. But these two factors probably won’t help much in the years ahead.

Another Wall Street Journal article (3-26-08) noted,

[W]hen stock investing becomes a mania, as it did in the 1920s, the 1960s, and the 1990s, it leads to prolonged periods of subpar performance. . . .

When you have extraordinary returns, as we did from 1982 through 1999, then usually the next 10 years aren’t very good. . . . [E]xceptional booms steal gains from the future. When the booms end, returns become subpar, so that average returns over the longer term fall back to the . . . norm.

Therefore, If you are likely to need to sell stocks to raise cash within a period of less than 10 to 15 years, give serious consideration to reducing your common stock holdings while their prices are not depressed.  By doing so, you will not need to be as concerned as you otherwise would about whether or not the prices of your common stock holdings will be depressed when you need the money.

A Wall Street Journal article (7-6-03) provided the following advice:

If you have 10 years until you will need your money, history suggests you have a good shot at earning decent gains with stocks. But once you get within five years of your goal, the risks rise appreciably and you should be looking to swap out of stocks and into bonds or money-market funds.

However, although 10 years may generally be long enough to earn “decent gains,” it is not long enough to provide the degree of certainty that a prudent person should be willing to accept.  As previously indicated, a time horizon of 15 years or more might be more prudent.