Standard deviation of returns, in investment parlance, refers to how much returns change in a given period. One common measure of risk is how much investment returns vary in the course of a single year. Risky assets are have the greatest deviation of returns in one year. Safe assets have the least deviation of returns in a year.

So stocks are considered risky because the price can go one way or another by about 40% in a given year (source: Jeremy Siegel, Stocks for the Long Run). Treasury bills are considered safe because the price hardly changes at all in a one-year time span.

The conventional wisdom is that your portfolio must get safer as you get older. This advice isn’t bad, but the notion of safety must be carefully considered.

Most people working today do not have pension plans. Pension plans are a great idea and were invented when the workforce was male, and the men laboured until age 65, retired, and died by age 70.

Today, the workforce is much more likely to work until age 60, retire, and live until age 90. Most companies do not offer pension plans because of the challenge and risk of funding and indexing long retirement payouts.

When you consider 30-year retirements, the greatest risk becomes inflation. At a rate of 3%, inflation will take away half your spending power every 20 years. A conservative portfolio, funding retirement for 20 or 30 years, needs to provide income and inflation-adjusted growth.

Long-term standard deviation of returns should come into the picture. Jeremy Siegel, in his great book Stocks for the Long Run, found stock returns deviate as much as 40% over a one-year time frame. He also found that, when you extend that time frame out to 20 years, the standard deviation of returns becomes roughly the same as treasury bills. Over 30 years, the returns actually vary less than treasury bills.

If you are looking forward to 30 years of inflation, the 11% to 12% long-term average return of stocks looks a bit better than 3% or 4% long-term average on treasury bills. In fact, a portfolio of dividend-paying stocks has, historically, paid out more income than a portfolio of GICs or bonds (over 20-year time periods) (source: Peter Lynch, Beating the Street).

It would be nice if investors could know what asset class is going up next year and what asset class is going down. Unfortunately, one-year movements of capital markets will remain a mystery. What every investor does know, however, is that retirement today is a long-term proposition.

Long-term liabilities (10 years plus) should be met with long-term assets, such as stocks or real estate. Short-term liabilities (less than 5 years) should be met with short-term assets such as treasury bills or GICs. To succeed with long-term assets, ignore the short-term fluctuations.

Today’s retirement is going to last a long time. Consider building a portfolio that includes a good-sized portion of dividend-yielding blue chip stocks.