Click here for an enlarged version: http://www.norstad.org/finance/risk-and-time.gif
A Better Bar Chart Showing Risk Over Time
- For example, at 40 years, the chart gives only a 2 in 3 chance that the ending value will be somewhere between $14,000 and $166,000.
- This is an enormous range of possible outcomes, and there's a significant 1 in 3 chance that the actual ending value will be below or above the range! You can't get much more uncertain than this.
- This is 1.26 standard deviations below the median ending value of the S&P 500 investment.
- The probability of ending up below this point is 10%. In other words, even over a very long 40 year time horizon, we still have about a 1 in 10 chance of ending up with less money than if we had put it in the bank!
- Imagine the chart if all we drew was that curve, so we were illustrating only the median growth curve without showing the other possible outcomes and their ranges.
- It would paint quite a different picture, wouldn't it? When you're doing financial planning, it's extremely important to look at both return and risk.