Had to register for this:
I don't think 20 years is enough to negate the risk of holding stocks. I actually don't think that any period of time is long enough to negate the risk of holding stocks.
The reason is, that even though the annualized return of stocks may converge towards some number (e.g. 7%), it does absolutely not follow that the return of your investments converge. They will actually diverge. Let me shortly explain:
Lets assume the 7% annualized is the "normal" or "expected" return. You invest $10,000, and after 10 years you find out that your annualized return is only 6.5%. You wait, and after 20 years your annualized return is 6.7%. You still wait ten more years, and after 30 years the return is 6.8%. After 40 years it is 6.9%. Everything seems to be going smoothly, and at first glance your return is converging towards the "expected" return.
But what about your actual dollars? After 10 years you will have $18,771. Compared to the 7% return, you are lagging $900. After 20 years, you'll have $36,584, but you will be lagging $2,113 compared to the 7% return. In 30 years you'll have $71,968, but will be lagging $4,155. 40 years and $144,247, but you'll be lagging $5,497.
So while your annualized return is converging towards the "expected" annualized return. Your return may actually be diverging from the "expected" return! (See Table below).
Ret. p.a. Assets ($) Diff. to 7% ret. ($)
10 years 6.5% $18,771 $900
20 years 6.7% $36,584 $2,113
30 years 6.8% $71,968 $4,155
40 years 6.9% $144,247 $5,497
This is of course just an example, but I have seen a paper that shows that the annualized return does not converge fast enough for the return in actual dollars to converge as well (but I can't find it to save my life). One bad year does not hurt too much, but after a bad decade you will have a hard time getting high enough returns fast enough for your dollar return to converge towards your "expected" return. Getting these returns will be even more difficult if you start shifting to bonds when coming closer to retirement. And I doubt that all the possible annualized return will even fall within 0.1 pp from the average of all the returns. If someone has historical data, it would be interesting to see what the possible annualized returns are for 10, 20, 30, 40, 50 years etc. Remember that your investment horizon does not end when you retire, and if you are lagging by then, good luck in catching up if you are holding more bonds and actually living off the returns as well.
I'm not saying that you can't hold 100% stocks. I'm just saying that stocks have a long term risk that you can not wait out. Stocks are risky, and hence you are paid a risk premium to buy them. It's a risk premium, not a patience premium. You can't negate the risk of stocks just by having the stomach not to sell during a bear market. The risk is there, and you have to be aware of both the short- and the long-term risk, especially if you are 100% in stocks. I'm not saying you have to sacrifice all the potential return to avoid risk, but if you can reduce risk (and hence avoid the worst possible long-term outcomes) without hurting your expected return (see graph by pmallory), you should really have a good and thought out reason if you choose not to.