In this section: Risky Business? Time vs. Risk The Stock Market Chamber of Horrors     Look Out Below     The Waiting Game     Power Failure     The Wall Street Water Torture     Monday Nights at Denny's Defense Is the Best Offense

THREE YEARS INTO this bear market, it's certainly understandable that some investors just can't get over their fear of losing money in the stock market. They seem to view equities as an anxious game of Russian roulette: The longer they stay in, the greater their chance of experiencing more losses. In fact, history shows that the opposite is true. The easiest way to reduce the risk of investing in equities — and improve the gain — is to increase the time you hang on to your portfolio. See for yourself. The demonstration below uses the time frame between 1950 and 2001 to compare investment returns over different lengths of time for different holdings. The graph starts out showing results for investments held over one-year periods. There's no doubt about it: Over such short intervals, small-cap stocks are definitely the riskiest bet. Sure, you could've doubled your money if you'd invested during the year starting July 1982 — the best 12 months of the bunch. But if you'd invested during the year starting October 1973, near the beginning of the OPEC oil embargo, you would've faced a disastrous 41% loss. Compare that with 20-year Treasury bonds — during their worst year, beginning April 1979, they were down only about 13%. Your browser is not Java-enabled. To view the worksheets and interactive graphs properly, you need to be using a Java-enabled browser (Netscape v. 3 or above, or Microsoft Internet Explorer v. 3 or above.), preferably on a Windows 95 machine. We are not currently supporting Java for Windows 3.1. If this configuration matches yours, check to make sure Java and Javascript are enabled in your browser options. Netscape 3.0: Select Options from your menu bar Select Network Preferences, then select LANGUAGES. "Enable Java" and "Enable Javascript" should both be checked. Click OK. Netscape 4.0: Select Edit from your menu bar Select Preferences, then select Advanced. "Enable Java" and "Enable Java script" should both be checked. Click OK. Internet Explorer 3.x: Select View from your menu bar Select Options, then select the Security tab. At the bottom of the page in the Active Content box, make sure all boxes are checked. (Note: You might also want to click the Safety Level button here and select Medium to prevent warning message interruptions.) Internet Explorer 4.0: Select View from your menu bar Select Internet Options, then the Security tab. For the Internet Zone, select Custom and click on Settings. Scroll down to the Java area of the list. Make sure that, under Java permissions, that 'Disable Java' is NOT active. Set this to low, medium, or high security instead. Scroll down to the Scripting area of the list. Under Scripting, set Active scripting to Enable, and set Scripting of Java applets to Enable. Click OK to return the Security Settings, then click Apply, and then OK. It's also possible that you are accessing the Internet from behind a corporate firewall that filters out Java. Your Systems Administrator may be able to allow Java coming from our IP address. If you are using the AOL browser, you must be using 32-bit version of the AOL 4.0 browser for Win 95, which comes bundled with Internet Explorer. If you are not using the latest release of the AOL software, contact AOL for a free upgrade. Sources: Ryan Labs, Center for Research in Securities Prices, Federal Reserve But what about investing for more than a year? If you move the slider at the bottom right of the graph, you can see the range of returns for longer time periods. Even investing for two years instead of one cuts your risk significantly. As the length of time increases, the volatility of equities decreases sharply — so much so that you may need to click the "zoom in" button to get a closer view. Over 10-year periods, government bonds look safer than large-cap equities on the downside. Click the "adjust for inflation" box, however, and you'll see that bond "safety" can be illusory. Inflation has an uncanny ability to erode the value of securities that don't grow fast enough. Now move the slider all the way to right to see the results of investing for 20-year intervals. Adjusting for inflation, the best 20-year gain a portfolio of long-term Treasury bonds could muster was 7.9% a year (October 1981 to October 2001). And bondholders who invested from 1961 to 1981 actually lost money. Meanwhile, with the same inflation adjustment, small-stock investors averaged an 8% gain over the 20-year periods measured. Their best result was a strong 13.5% from January 1975 to January 1995, their worst, 2.7% starting January 1955. Of course, this doesn't mean you're guaranteed to make money buying small-cap stocks. The statistics we've cited are market averages and reflect the range of returns you'd expect from an index fund, rather than a portfolio of just a few individual holdings. And although the numbers show that it's a good idea to stay in the market as long as possible, they say nothing about how long you should hang on to particular stocks or funds. The overall lesson, however, is simple: The stock market delivers its cruelest blows to those who cash out too early.

The easiest way to reduce the risk of investing in equities — and improve the gain — is to increase the time you hang on to your portfolio.