Now, actually deciding on how much risk you need to take is very difficult. You need to be able to keep your asset allocation in both good years and bad years, so in on one side you have to measure how much risk you can take – risk tolerance. On the other side, there is a certain amount of risk you need to take in order to outrun inflation and reach your investment goals. Finally, you have to take into account that risk also decreases over time.
You can see here why stocks are considered a good long-term investment, but a horrible short-term investment. This chart shows that for any 25-year period within 1950-2005, the very worst you would have done was +7.9% annually while the best was +17.2%. However, for a 1-year time horizon, the possible returns vary wildly.
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