The odds of losing money in stocks drops from 23% to near zero when you hold long enough.
KEY TAKEAWAYS
Long-term investing reduces volatility dramatically over time
Probability of loss drops near zero after 20 years
Returns stay consistent—risk does not
Compounding transforms luck into math
Market timing is a fool’s game; endurance is the edge
MY HOT TAKES
Time is the real alpha, not stock selection
Volatility is emotional, not financial, for long-term investors
Every bear market is a temporary sale
People confuse noise for risk and luck for skill
The smartest investors win by being patient, not clever
You can quote me: “Short-term investing is luck; long-term investing is math.”
Always win! Are we in a stock market bubble? That seems to be the question for everyone–including my shoe-shine boy. Calm down, I don’t have a shoe-shine boy, although a nice cobbler does occasionally come up to our downtown NYC office. He is not a boy, but rather, a wise, older gentleman who has been walking the narrow, cobblestoned streets for longer than I have. That said, I don’t ignore someone with THAT type of longevity.
Do you want to know how I answer that question about the bubble? Wait, let’s step back, you know what I say about bubbles, because I have been writing a lot about them and I have posted lots of videos on the subject. This morning I am going to tell you how I would LIKE to answer the question–so, basically what is going through my brain when I am asked that question.
And that answer is: “maybe, I don’t know… in fact, I don’t care!” Go ahead, read it again. 👈 Did I shock you with that? Am I worried that the stock market can pull back? Absolutely–and by the way, stocks can’t always just go up. 🤣Obviously the idea is to pick investments that will only pull back for the wrong reasons. Good investments will always stand the test of time. But to be clear, some investments may start out as solid with good investment theses, and then they change over time, usually due to management missteps. When that happens, stocks are likely to go down for the right reason and it is appropriate to get out and move on to one of the always many, many other opportunities. This should be obvious to you, but I realize it is not always to execute–for most people at least.
I am going to share another secret with you this morning. My long-term readers/viewers have heard me say time and again that “long-term always wins,” and it does. Why do you think that both Warren Buffet–the Oracle of Omaha–and his long-time partner, the late Charlie Munger were always talking up the benefits of long-term passive investments in products like ETFs. This, despite the fact that they made a living by picking stocks–actively. Well, they probably know the numbers like I do. So, pay attention and I will show you the analysis that I clutch tightly when I am in doubt.
I wrote an R-language program to look back at the S&P 500 from the 1920’s through current and compare return profiles of different holding periods, longer and shorter.
When you look at this chart, the math practically yells the lesson. The average annualized return for holding periods of two, three, five, ten, and twenty years doesn’t move much–it hovers right around 6½ to 7 percent. What does change dramatically is the standard deviation (lines above and below average dots), the measure of volatility. For two-year holding periods, the standard deviation is roughly 13.7%. At three years, it drops to about 10.9%. By the time you stretch your horizon to ten years, it’s only 5.2%, and for twenty years, a remarkably tight 3.1%. You can literally see the risk shrinking with time.
What that tells you is that the mean return stays roughly the same–long-term investors aren’t giving up performance–but their experience of that return becomes far more predictable. The further out you go, the more the jagged edges of market volatility get smoothed out. In practical terms, that means a ten-year investor experiences only about a third of the volatility a two-year investor does, yet earns about the same annualized return. Long-term investors don’t necessarily get higher returns, but they get far less chaos getting there–and that’s what most people confuse with risk.
The next insight comes from the shape of the return distribution itself.
This chart shows density curves for all the annualized returns across those same holding periods. The shorter the horizon, the fatter and wider the curve–the two-year distribution (light green) is basically a carnival ride, with deep tails extending into ugly negative returns (that’s what we refer to as ‘fat tails’ on Walls Street). Those long tails represent downside risk, the nightmare scenarios investors fear when markets suddenly turn. As you move to five, ten, and twenty-year horizons, the distribution tightens. The tails narrow, the left side (losses) nearly disappears, and the whole shape slides rightward. That’s the visual proof that time is the only real hedge against volatility. You can see it with your own eyes: the longer the period, the more compact the curve, the less chance of serious damage.
Put simply, the longer you hold, the less extreme your possible outcomes become. Over two years, your experience is driven by luck–catch the wrong two years, and your portfolio bleeds. Over twenty years, luck gets replaced by math. Compounding takes over, smoothing returns into something far more reliable. It’s like trading in a sailboat for a tanker–storms still happen, but you barely feel the waves.
Now, if you prefer percentages over pictures, this chart puts the odds on paper. The probability of losing money–defined as ending a holding period with a negative annualized return–starts high and collapses with time. For two-year windows, about 23 percent of the time you’d have lost money. At three years, it drops slightly, then keeps falling with each additional year. By ten years, the probability of loss is just over eleven percent. Stretch to twenty years, and that number falls to nearly zero.
You don’t have to be a statistician to see the message. Every extra year you hold reduces your risk exposure not linearly, but exponentially! The standard deviation and probability of loss shrink together, reinforcing the same truth from two different angles. Markets may be unpredictable in the short run, but in the long run, the odds shift decisively in your favor.
Finally, take a look at this timeline chart. It’s the historical map of market pain. Each horizontal panel represents a different holding period, and every black segment marks a stretch of time when that horizon would have produced a loss. You can see how frequent and scattered those loss intervals are for the shorter holding periods at the bottom–two and three years look like patchwork quilts of market stress, especially around the Great Depression, the stagflation era of the 1970s, and the dot-com and financial crises. Move up the chart, though, and the dark lines thin out dramatically. By ten years they’re rare. By twenty years, they nearly disappear. That visual silence at the top is the sound of compounding doing its work: even the worst-timed entries into the market ultimately turned positive when given enough time.
It’s the compounding effect at work. Markets reward patience because the underlying economy keeps expanding. Companies innovate, populations grow, and productivity rises. Yes, recessions interrupt that rhythm, but they don’t erase it. The longer you hold, the more those inevitable setbacks become rounding errors on the path upward.
And that’s the point of this entire exercise. It’s not about finding a magic formula or predicting the next recession or rate cut. It’s about understanding that time is the formula. The market will always have corrections, bubbles, panics, and melt-ups. But through all of them, the simple act of staying invested transforms uncertainty into inevitability.
When I say “long-term always wins,” I’m not making a motivational speech. I’m stating a statistical fact. The data spanning nearly a century says that investors who stay invested for ten or twenty years are not just more likely to win–they almost always win. Every bear market in history has eventually been followed by a higher high. That’s not optimism; it’s just math, stupid.
So the next time someone corners you with the bubble question, remind them that bubbles come and go, but time compounds forever. Pull up that first chart 🙃 and point out how volatility melts away the longer you hold. Show them the colorful distribution chart with those tightening curves. Remind them that every stretch of bump in the timeline eventually went down, replaced by decades of growth.
That’s why I don’t waste my breath arguing about tops and bottoms. I don’t time markets; I outlast them. The real edge isn’t in predicting where the market goes next–it’s in giving it enough time to work its magic. And that, my friends, is how you win. Always!
YESTERDAY’S MARKETS
Stocks rallied yesterday on news that the Senate cleared a path to vote on a continued resolution (the vote actually happened last night 😀). Bond yields climbed because folks are starting to talk about the deficit again–surely we will hear more about this in the days ahead, so bookmark this.
NEXT UP
Bond markets are closed for Veteran’s Day.
NFIB Small Business Optimism (October) fell to 98.2 from 98.8, slightly lower than expected.
Fed Governor Michael Barr will speak today.
Important earnings today: Fermi and Oklo 😮