How risky are stocks?
The probability that stocks will perform worse than risk-free investments, such as TIPS or I-Bonds, gets smaller the longer you hold them. After 30 years, there is a 95% chance that stocks will beat TIPS. But the severity of a possible shortfall gets bigger. For example, say you have $500,000 and are three years away from retirement. If you suffer three years of 15% losses, your savings will be almost cut in half — and your retirement will be jeopardized. Of course, the longer the string of losses continues, the larger the shortfall will be. Q: Please explain. A: The consensus view — and this is based on estimates — is that over the next 30 years, if you were to invest in a diversified portfolio of U.S. stocks, you’d beat inflation by about 4 percentage points a year. But there’s a tremendous amount of uncertainty surrounding that — not just in the short-run but in the long-run. Historically, stocks’ standard deviation has been 20%. That means you shouldn’t be at all surprised if y
