Do Stocks Get Safer The Longer You Own Them?

Retirement planning is full of clichés, many of which offer sound advice—but not always for the right reasons. One common saying is that focusing on the long term reduces investment risk. While investing is undeniably a long-term endeavor, does holding stocks (or other investments) actually make them safer over time?

What Does Long Term Even Mean?

Before examining whether stocks are safer in the long run, it’s worth clarifying what “long run” actually means. It’s often vaguely defined as “not the short run,” which isn’t particularly helpful.

The financial markets are inherently noisy and unpredictable. The idea behind focusing on the long run is that, over time, short-term volatility will even out, leaving only the expected returns. While this is partly true—markets are full of short-term noise that should often be ignored—it’s not the whole story.

For example, from January 1 to October 17, 2023, the S&P 500 gained about 520 points. However, its daily price movements totaled over 5,496 points—more than 10 times the net gain. This is like driving from Portland, Maine, to Washington, DC (about 540 miles), but taking a detour through Las Vegas and the Grand Canyon (over 5,380 miles). Even over a year, market returns can be wildly volatile.

It takes several years to smooth out this randomness. Just as there’s no clear point where a portfolio becomes “diversified,” there’s no exact moment when the short term turns into the long term. That said, much of the noise diminishes after about ten years. The short term lasts longer than many think—but not forever.

What’s Left After the Noise

While time can reduce the random noise in returns, it doesn’t eliminate the underlying risks of investing. Investing in financial markets is inherently risky—and that risk is precisely why we invest. Higher expected returns are the reward for taking on risk, which isn’t just random volatility that fades over time but a fundamental characteristic of the investment itself.

We can see this clearly when we think about buying a single stock. When you buy shares, you’re making a bet on that company. There is a fundamental risk as to how that company will do in the future. And that risk will never go away. You can hold those shares for 50 years and that risk will still be there. The returns we are looking for from our investment are compensation for holding onto this risk.

While time may smooth out short-term fluctuations, the inherent risk remains—and that’s a good thing. It’s the tradeoff that makes investing worthwhile.

Looking at the (Simulated) Outcomes

Let’s set aside the theory and assume time diversification works, canceling out year-to-year risk. What impact would that have on retirement plans?

Investing is ultimately about funding future spending—putting money at risk to grow it for withdrawals later.

To explore this, we used Monte Carlo Analysis, a simulation method that randomizes variables (in this case, annual investment returns) to analyze outcomes. We ran 1,000 simulations with an 8% average annual return, a 10% standard deviation, and a starting portfolio of $100,000 over 50 years.

Here’s what we found:

• Average Returns: As expected, the average annual return hovered around 8% over time, but this wasn’t the interesting part.
• Outcome Distribution: Even with purely random noise (no fundamental investment risk), the dollar outcomes varied widely, even after 50 years.

We can look at this distribution in a lot of ways, but one of the most intuitive ways is to look at the 25^th and 75^th percentile results. The 25^th percentile result is the one that is better than 25% of the results, and the 75^th percentile result is the one that is better than 75% of the results. So, in this case, since we are working with 1,000 simulations, the 25^th percentile is the 250^th best result, and the 75^th percentile is the 750^th best result. In other words, half the time you are between the 25^th and 75^th percentiles and half the time you are outside of them. You can certainly do a lot of math and get a much more precise picture of the distribution, but this works for eyeballing purposes.

Let’s look at the numbers.

	10 Years	20 Years	30 Years	40 Years	50 Years
25th Percentile	$174,687 (5.74%)	$328,342 (6.12%)	$636,198 (6.36%)	$1,247,758 (6.51%)	$2,485,797 (6.64%)
75th Percentile	$251,942 (9.68%)	$581,241 (9.20%)	$1,288,568 (8.89%)	$2,756,958 (8.65%)	$5,844,599 (8.48%)

There are a couple of things that are worth pointing out here. Focusing on the returns, the longer the simulation has run – the tighter the returns get. There was a nearly four percentage point difference between the 25^th and 75^th percentile returns at 10 years, but less than a two percentage point difference between the 25^th and 75^th percentile returns at 50 years. The longer the simulation runs, the more the good and bad returns cancel out on average.

But there’s an important effect when we start looking at the total returns (the actual dollar values) rather than just the annualized return numbers at different points in time.

	10 Years	20 Years	30 Years	40 Years	50 Years
Ratio between 75th and 25th percentile	1.44	1.77	2.03	2.21	2.35

Even with only the random part of the risk, the gap between good and bad outcomes grows over time. If stocks truly got safer in the long run, we’d expect these outcomes to converge—but they don’t. The fact that we don’t, even in the best-case scenario for time diversification, says that it just doesn’t work. Stocks do not get safer the longer you hold them. But let’s turn back to the theory for a minute.

The Markets Only Look Forward

In our simulation, the returns were truly random (or as random as a computer can be). But those returns were centered on a specific number. And the longer the simulations ran the more confident you could be that your observed returns would converge on that number.

The real world does not operate like that. There is no specific number that is the “true” return for any given security or the market as a whole. Markets constantly adjust, and expected returns are always in flux—especially over the long term.

The markets do not care about what has happened in the past, nor do they “owe” good or bad returns. Prices move based on future expectations and how new developments align with those expectations, not on how a security has performed historically.

As portfolio traders often say, “Don’t hold something you wouldn’t buy today.” If you wouldn’t build your current portfolio from scratch, it’s worth rethinking its structure. It can be easy to get carried away with investing, which is why long-term discipline and focus are essential for a successful experience. However, it’s not because investing becomes safer over time. Instead, just like with traditional diversification, it allows you to cut through the noise and focus on the fundamental risk and return dynamics that drive portfolio returns and help achieve your retirement spending goals.

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1. 1. All distances from Google Maps.