Don’t even think about owning stocks unless you’re ready to buy and hold for at least 10 years

These visions may occur, but a long wait awaits you. In fact, only if you are ready to stay out of your money for 10 years until 2030, you should consider putting fresh money in the stock market right now.

I say that not because I think it will take time for the S&P 500
SPX
-1.04%
to recover from the coronavirus pandemic. My advice is rather based on historical ratings. After holding stocks for at least 10 years, you have an 80% chance of beating bonds. If the one in five chance of a bond default is still too high, you should be prepared to leave your capital investments intact for more than 10 years.

Consider the percentage of times since 1801 that the US stock market has outperformed bonds, according to calculations by Jeremy Siegel, professor of finance at the Wharton School at the University of Pennsylvania and author of “Stocks For The Long Run “.

For example, as you can see in the chart below, stocks have outperformed bonds in 71% of all consecutive five-year periods since 1801. Even assuming the future will be like the past, a generous assumption as I argued elsewhere, that means there is a 29% chance that the money you invest in the stock market today will not outperform bonds over the next five years. With bond yields currently so low, this is a daunting prospect.

I focus on five years because many financial planners and advisers do not respect this holding period when pressed for the minimum amount of time that investors need to leave the money they put on the stock market intact. But a 29% probability of bond delays is too high.

What if you want a 95% chance that stocks will outperform bonds? This is the threshold that statisticians often use to determine whether the probabilities of failure are acceptably low. As you can see from the graph, the lesson from the past two centuries is that you have to be prepared to keep your investments for more than 20 years.

Faced with these statistics, some argue that the ratings of stocks maturing on bonds in the coming years must surely be higher than what I present here, because current bond yields are very low. But the data does not necessarily support this argument. While the long-term outlook for bonds currently looks dull at best, the same is true for the stock market (as I said in a recent column).

What if the outlook for stocks is overstated?

As alarming as these statistics are, they may well exaggerate the chances that stocks outperform bonds. This is the conclusion of research carried out by Edward McQuarrie, professor emeritus of the Leavey School of Business at the University of Santa Clara, who worked meticulously The reconstructed bond market returns in 1793. He found that bonds in the 19th century had a significantly higher yield than previously estimated.

The following table summarizes what McQuarrie has found for 20-year waiting periods since the late 18th century. (Note that you consider bonds and stocks to be linked when the difference in their annualized returns is less than half a percentage point.)

All periods of 20 years ending between …	Bonds matured stocks	Matter Bonds Stocks	Stock tie and tie
1813-1900	51%	29%	twenty%
1901-2013	5%	81%	14%

As you can see, the lesson you learn from the history of the United States essentially depends on the period in which you focus.

At the end of the line? When you make sure that the long term will save your equity portfolio, make sure you really focus on the long term. Don’t be short term oriented like some on Wall Street, where a joke is that the long term lasts from lunch to dinner.

Mark Hulbert is a regular contributor to MarketWatch. His Hulbert notes follow investment bulletins that pay fixed costs to be audited. He can be contacted at [email protected]

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