There are few expressions as important to the financial services world as "long term." It's right up there with asset allocation and diversification as a signature term that recurs in every marketing pitch and presentation-and rightly so, as all three concepts have been validated by the performance of the stock market over time. But, seduced by the returns of the last bull market and perhaps overconfident because of the instant access to financial information, some investors have been steadily winnowing back their idea of what the long term is-from a decade to less than a year. The results are inflated and sometimes unmanageable expectations on their part, a state of high anxiety that this year's stock market performance has done nothing to allay, and plenty of angst for those financial advisors who have to manage their time-challenged clients.

Recent research that we've conducted underscores this trend. Over the last six years, we've tracked the changing idea of "the long term" among individual investors with an income of at least $75,000, all of whom have some of their money in the stock market. The chart below shows just how much their definition has changed over that period. Most telling, nearly two-thirds of the sample group defined "long term" as more than a decade just three years ago, while only one in six did so this year.

A study by Bain & Company released earlier this year revealed a similar trend. It found that the average holding period for stocks had gone from eight years in 1960 to two years in 1990 to only 11 months in 2001.

In our study, we also asked the same investors about their willingness to lose money when investing in equities. The numbers zigzagged from 18.6% in 1996 all the way up to 34.6% in 1999, before plummeting to 4.2% this year. Those figures are understandable given the opportunity for profit in 1999-everyone was willing to take a flyer on equities at that time, it seemed-and the punishment that's been inflicted on their portfolios this year. But the combination of a shorter timeframe for success and a heightened aversion to loss is a bad one for investors and advisors alike.

The Antsy Investor

So what happened to change the way that investors think about the long term? How did the long term go from a decade to the interval between mutual fund statements? The answer is two-fold: outsized profits and ready data about stocks.

While the stock market has always been profitable for those investors who invested for the long term-which we'll define as a decade-there has never been a period like that of 1980-99. Despite the odd downturn and off year, the stock market's annualized return during that period was 17.9%, about twice the average for the preceding half century. That means that even conservative equities investors could double the size of their portfolio in 51/2 years. It's hard to be patient when those kinds of returns are the norm. In the 1970s, the stock market was a somewhat mysterious casino where some in-the-know people risked a little bit of their money. By the 1990s, it had become the national hobby and all but a sure thing. As a result, investors regularly bought and sold stocks without much fear of losing-and, up until two years ago, anyway, they could get away with it.

At the same time, as we all know, there's never been more information available about stocks and investing than there is today. A decade ago, few people obsessed over Morningstar ratings, researched stocks or traded online. But the ready data and ease of trading by individual investors led to far more active involvement. That's probably a good thing, overall. But knowledge can also lead to a higher level of anxiety and reflexive transactions that undermine a portfolio's design. Portfolios are put together to weather and even benefit from market cycles, not to be torpedoed in the middle of them. The idea of long term was further eroded. And, as a number of studies have shown, the more information investors have, the worse they tend to do.

Too Many Stocks

There were other negative side-effects to the long economic expansion and bull market. Because of the profits being made, many investors kept putting their money-directly and through their 401(k)s-into stocks because it seemed like a no-brainer. Why settle for the paltry returns on bonds or a money market account when the Nasdaq was barreling toward the 5,000-point mark? As a rule, investors are usually advised to have no more than half of their investable assets in equities, but that rule was routinely violated during the 1990s. Many investors also abandoned diversification to chase profits in such sure bets as technology. The result was an overemphasis on equities, an expectation of double-digit returns, and very little patience for losses. And then the market slowed and tumbled into bear territory.

Of course, it's hard to fault anyone for that short-term approach given that the era from 1980 through 1999 was the most profitable in stock market history. The problem is convincing an entire generation of investors who grew up during that time how aberrant it was.

The Trend Toward Profitability

As anyone who studies the historic performance of the stock market can tell you, there's no worse time to be a short-term investor than when the market is down. Over 10-, five- and even three-year spans, the market rarely falters. There's no better evidence of that than the fact that, should the market finish down this year for the third year in a row, it would be the first such stretch since the Depression. And, as the list below illustrates, an investor is usually pretty safe holding on for five years or more. Those who held on for a decade, despite the carnage of the last two years, have more than doubled the value of their portfolio. That's not 20% a year, but it's 10%, which would be fine in any other era or investment arena.

In between the five- and 10-year figures there were of course plenty of ups and downs, booms and busts, wars and scandals. Even during the long boom of 1980-99 there were four dramatic downturns-1987, 1990, 1994 and 1998. And that's the point: Short-term investors can get burned. If they hold on, however, the odds are very much in their favor.

Remember The "Long Term"

Even for those investors who understand the long term, the market's performance this year has put many of them to the test, if not to the mat. That's why, in the current market environment, financial advisors should ask their clients why they want to invest in equities and what they mean by "long term." In the long term, stocks do go up, and they offer a better return than bonds or most other investments. But if they're not in the market for at least three to five years, perhaps they shouldn't be there at all; they would be better off putting their money into bonds and money market funds.

That's because portfolios are designed to meet long-term objectives, and long term does not mean the next quarter or even the next year; it could mean five years down the road when the first child goes to college or 20 years from now when it's time to retire.

Furthermore, in the event that they haven't already figured it out for themselves, investors should be told that the days of 20% returns are dead and gone; analysts are estimating that the average annual return over the next decade will be anywhere from 5% to 10% but nowhere near 20%.

In the meantime, investors should also be reminded of the virtues, however stodgy, of diversification and asset allocation. And they should do everything they can to ignore the ongoing drama of the down market. That's a lot to ask given the news of late, but the time will come when the fall of Enron and WorldCom will be footnotes rather than front-page news, short-term blips on the graph of long-term stock market growth.

Hannah Shaw Grove is managing director and chief marketing officer of Merrill Lynch Investment Managers. Russ Alan Prince is president of the consulting firm Prince & Associates.