How Long Is a Long-Term Investment?

Conventional wisdom tells us that stocks tend to outperform government bonds in the long term. That is, if stocks are held long enough, they are usually better investments because their total return is likely to be higher than the return on bonds. While this view may be correct in principle, in practice a crucial question remains: How long is long enough? The answer is important to every investor, not just the wealthy few. With employers relying increasingly on defined-contribution retirement plans, employees must make their own saving and investment decisions. This article reviews historical patterns to show investors how the riskiness of stocks and bonds can change as an investor’s holding period lengthens. The first section of the article explains why stocks are generally considered riskier than government bonds and thus, on average, should pay higher rates of return to attract investors. It then shows why stocks, with their higher average rates of return, tend to perform better over sufficiently long holding periods. The second sectio