How Long Term Is "Long Term"?
OK so I’m as guilty of this one as much as anyone.
Investment marketing brochures, usually containing stock photos of the elderly on a sailboat, will constantly remind people that they need to invest “for the long term”. Which is true, but it is kind of wishy washy and we aren’t fans of that round here.
When we say “long term” - what sort of timeframe are we actually talking about? Or over what kind of period should we reasonably expect the odds to be overwhelmingly on our side when it comes to seeing a positive outcome?
To find out, I got my old mate Claude to dig through the annual return data for a global stock market index and a global bond market index from 31st August 1990 to 31st August 2026, and calculate the historical probability of a positive return for four different strategies over one, five, ten and fifteen years.
The four strategies I have chosen are:
100% global bonds
60% stocks & 40% bonds
80% stocks and 20% bonds; and
100% global stocks.
Where there is more than one asset class within the portfolio, I have chosen to rebalance the portfolio back to its starting asset allocation annually.
Ok so what we clearly see, is that the longer we hold any of these strategies the better our odds of a positive return. So far, so simple.
Bonds generated a positive return over one year more consistently than stocks, but come the five year holding period they actually did worse - generating negative returns more frequently. The reason for this being the bond massacre we saw in 2022 which decimated long term returns for bond holders who had invested during the “ZIRP” period.
This would seem to provide an argument for holding “shorter duration” bonds within a portfolio, rather than longer duration particularly if you are going to need that money in the next couple of years.
The other point that is interesting to me is that stocks weren’t guaranteed to do the job over even a ten year period. The unlucky sod who invested in global stocks from August 2000 to August 2010 was still down 3.7% after a full decade of waiting.
This would suggest that for pure equity investors, they need to be thinking in terms of decades rather than ten years or less.
But for investors with shorter timeframes, the diversifying effect of combining bonds and stocks (and rebalancing along the way) has worked really well over the past thirty six years. The classic 60/40 portfolio was the only one to have a full 100% success rate over 5, 10 and 15 years.
So far we have only looked at the probability of a positive return in nominal, or absolute terms.
But when we invest, we do so to protect the value of our money in the real world and so we should also compare the returns of each of our four strategies to inflation.
Ok so not great news for bonds again. When we introduce inflation into the equation, we can see that bonds are actually riskier to hold than stocks over five, ten and fifteen years.
But when bonds are held in combination with stocks, particularly in a 60/40 split, we can see a nice balance between success probability and inflation protection.
Once again, holding stocks for ten years does not guarantee a return over and above inflation, it is not until we get to the 15 year time period that stocks had a 100% track record of generating real returns.
So what is the takeaway?
“Investing for the long term” means different things, depending on what asset class(es) you are invested in:
Bond investors should think in terms of months - 24 to 36.
Diversified investors should think in terms of years - 3 to 10.
Equity investors should think in terms of decades.
In today’s exercise, we have just considered the probability of a positive outcome and we have completely ignored the historical returns generated by each of these strategies.
If we were to consider returns as well, we would clearly see that investing in stocks offered the highest average annual return over this period, with returns steadily falling for the four strategies as equity content is reduced.
But in order to access these spectacular returns, you had to get comfortable with the fact that you have the time available to accept the (potentially large and potentially long) periods of drawdown that equity markets go through.
If time wasn’t on your side - you had buy some insurance by diversifying.
Past performance is not indicative of future returns. None of the above should be regarded as investment advice to any individual, if you have any queries regarding your individual position please consult with a regulated financial adviser.
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