Does stock risk decline the longer the holding period is? It’s a great question and something I received a comment about.
Blaise Pascal, a brilliant 17th-century mathematician, famously argued that if God exists, belief would lead to infinite joy in heaven, while disbelief would lead to infinite damnation in hell. But, if God doesnโt exist, belief would have a finite cost, and disbelief would only have, at best a finite benefit.
Pascal concluded that given that we can never prove whether or not God exists, itโs probably wiser to assume he exists because infinite damnation is much worse than a finite cost.
When it comes to investing, Pascalโs argument applies as well. Letโs start with the following comment.
โThe risk of buying and holding an index is only in the short-term. The longer you hold an index the less risky it becomes. Also, managing money is a foolโs errand anyway as 95% of money managers underperform their index from one year to the next.โ
This is an interesting comment as it exposes two primary falsehoods.
Letโs start with the second comment, โ95% of money managers canโt beat their index from one year to the next.โ
The Great Con
One of the greatest cons ever perpetrated on the average investor by Wall Street is the โyou canโt beat the index game.โ It is true that many mutual funds underperform their index from one year to the next, but this has nothing to do with their long-term performance. The reasons that many funds and investors underperform in the short term are simple enough to understand if you think about what an index is versus a portfolio of invested capital.
- The index contains no cash
- It has no life expectancy requirements โ but you do.
- It does not have to compensate for distributions to meet living requirements โ but you do.
- It requires you to take on excess risk (potential for loss) to obtain equivalent performance โ this is fine on the way up but not on the way down.
- It has no associated taxes, costs, or other expenses โ but you do.
- It has the ability to substitute at no penalty โ but you donโt.
- It benefits from share buybacks โ but you donโt.
- It doesnโt have to deal with what โlifeโ throws at itโฆbut you do.
However, the myth of โactive managers canโt beat their indexโ falls apart given time, as clearly shown in the chart below.

Oops. There are large numbers of active fund managers who have posted stellar returns over long-term time frames. No, they donโt beat their respective benchmarks every year, but beating some random benchmark index is not the goal of investing, to begin with. Investing aims to grow your “savings” over time to meet your future inflation-adjusted income needs without suffering large capital losses along the way.
Investing and avoiding major losses brings us to the first point of our comment that “stocks become less โriskyโ over time.โ

Stocks Become Less โRiskyโ Over Time?
This idea suggests the โstock riskโ diminishes as time progresses.
First, the risk does not equal reward.
โRiskโ is a function of how much money you lose when things donโt go as planned.
The problem with following Wall Streetโs advice to be โall in โ all the timeโ is that eventually, you will be dealt a bad hand. By being aggressive, and chasing market returns on the way up, the higher the market goes, the greater the risk that is being built into the portfolio. Most investors routinely take on more โriskโ than they realize, exposing them to greater damage when markets undergo a reversion process.
How do we know that stock risk increases over time? The cost of โinsuranceโ tells us so. If the โriskโ of ownership declines over time, then the cost of โinsuringโ the portfolio should also decline. The chart below shows the cost of buying insurance (put options) on the S&P 500 exchange-traded fund ($SPY).

As you can see, the longer a period our โinsuranceโ covers, the more โcostlyโ it becomes. This is because the risk of an unexpected event that creates a loss in value rises the longer an event doesnโt occur.
Furthermore, history shows that large drawdowns occur with regularity over time. Such is particularly true when the Federal Reserve tightens monetary policy by hiking rates.

Yes, the financial markets over the last decade, due to massive monetary accommodation, defied the laws of fundamentals and logic.
But as Mr. Pascal suggests, even if the odds of something happening are small, we should still pay attention to that slim possibility if the consequences are dire. Rolling the investment dice while saving money by skimping on insurance may give us a shot at amassing more wealth, but with that chance of greater success comes a risk of devastating failure.

Winning The Long Game
In golf, there is a saying that you โdrive for show and putt for dough,โ meaning that it is not necessary to be able to drive a golf ball 300 yards down the center of the fairway. The skill of putting, measured in feet, will win the game.
Investing is much the same. Investing in the market is one thing. However, understanding the โshort gameโ of investing is critically important to winning the โlong game.โ
When valuations rise to rarely seen levels, and the associated risks of a major drawdown increase exponentially, investor should focus on managing the โstock riskโ of the portfolio rather than chasing โreturns.โ
Investors would do well to remember the words of the then-chairman of the Securities and Exchange Commission, Arthur Levitt, in a 1998 speech entitled โThe Numbers Game:โ
โWhile the temptations are great, and the pressures strong, illusions in numbers are only thatโephemeral, and ultimately self-destructive.โ
But it was Howard Marks who summed up our philosophy on โrisk managementโ well when he stated:
โIf you refuse to fall into line in carefree markets like todayโs, itโs likely that, for a while, youโll (a) lag in terms of return and (b) look like an old fogey. But neither of those is much of a price to pay if it means keeping your head (and capital) when others eventually lose theirs. In my experience, times of laxness have always been followed eventually by corrections in which penalties are imposed. It may not happen this time, but Iโll take that risk.โ
Clients should not pay a fee to mimic markets. Fees should be paid to investment professionals to employ an investment discipline, trading rules, portfolio hedges, and management practices proven to reduce the probability of serious and irreparable impairment to their hard-earned savings.
Unfortunately,ย the rules are REALLY hard to follow.ย If they were easy, then everyone would be wealthy from investing.ย They arenโt because investing without discipline and strategy has horrid consequences.
Personally, I choose to โbelieveโ as I really donโt like the sound of โeternal damnation.โ