the second anniversary of the covid19 pandemic is a perfect time to reflect on risk and how it might impact your retirement financial security it was two years ago this week—march 11 2020 to be exact—when the world health organization formally declared covid19 a global pandemic yet just two or three months before that declaration no one outside a handful of epidemiologists had even heard of the virus much less were worried that the economy was about to be put into the equivalent of a medicallyinduced coma read two years of covid19 how the pandemic changed the way we shop work invest and get medical care but even if you did somehow have advance knowledge of the pandemic and that we would be struggling with it in two years’ time you still would have gotten it wrong you undoubtedly would have predicted a prolonged period of poor stock market performance or worse i highly doubt that any of you would have guessed that the stock market today would instead be some 50 higher nor can we overlook how russia’s invasion of ukraine took everyone by surprise even though russia several months ago started amassing troops on the ukrainian border few expected the country to actually invade it’s not even clear that russian president vladimir putin himself knew what he was going to do furthermore the strength of the ukrainian resistance “continues to surprise russia” according to a british intelligence report as if that’s not enough uncertainty it’s rumored that russia is contemplating the use of chemical biological or even nuclear weapons in ukraine it’s hard to overstate the associated risks is the sea really calm after the storm has passed i could go on and on but none of us—least of all retirees—need to be reminded that the future is uncertain instead we need to be reminded of how this uncertainty and risk play out over the long term the traditional belief repeated by almost every adviser and financial planner is that the markets eventually recover and things ultimately calm down wharton professor jeremy siegel in his book stocks for the long run is famous for showing that the standard deviation of returns declines as holding period lengthens this is illustrated in the accompanying chart which i produced after updating data presented in siegel’s book when holding stocks for one year for example the standard deviation is more than 18 per statistics 101 that means—on various assumptions including that the future is like the past—95 of years should fall within two standard deviations above or below the average that’s a very wide range of over more than 72 percentage points notice that at the 10year horizon however the standard deviation drops below 5 and when holding period lengthens to 30 years it drops below 2 that implies that 95 of all 30year returns will fall within a range of 8 annualized percentage points—a lot less than 72 percentage points i’m not sure how useful this information is however as british economist john maynard keynes argued a century ago “economists set themselves too easy too useless a task if in tempestuous seasons they can only tell us that when the storm is long past the ocean is flat again” consider research conducted by robert stambaugh a colleague of siegel’s at the wharton school and lubos pastor of the university of chicago their peerreviewed study which was published in the journal of finance is titled “are stocks really less volatile in the long run” the professors in effect argue that the us stock market over the last 220 years got lucky and there is no assurance that in the future risk will decline as holding period lengthens the complex statistics the professors employ is beyond the scope of this column but i described their findings in greater detail in an october 2020 column but one of their conclusions that is particularly sobering is that when holding stocks for 30 years your risk is nearly 50 greater than when holding for just one year another study by pursuing a different statistical approach reached largely similar findings titled “the volatility of stock investor returns” the study was conducted by ilia dichev a professor of accounting at emory university and xin zheng a professor of accounting at the university of british columbia the professors focused on investors who are actively trying to beat the market and measured how much more volatile their portfolios will be than a simple index fund the professors found that at “the 10year horizons the investors’ portfolios… are about 1520 more volatile than the overall market but this differential rises to 7075 for the 30year horizon specifications” a third approach is to calculate how much an insurance company would charge you for a hypothetical policy that insures against your portfolio losing money this approach to analyzing risk was proposed decades ago by zvi bodie who for many years was a finance professor at boston university upon applying the standard theoretical formulae for such a calculation bodie found that as time horizon lengthens the cost of such insurance rises the investment implication of these studies is that risk is far greater than we previously thought a corollary is that sources of guaranteed income—annuities for example—become more important than ever only after we’ve made sure that our basic needs will be met should we even contemplate making speculative bets in our portfolios mark hulbert is a regular contributor to marketwatch his hulbert ratings tracks investment newsletters that pay a flat fee to be audited he can be reached at markhulbertratingscom