In the chart you link to, the bonds are long term and were subject to more
years of inflation than deflation during the years covered. This would not
be the case with the strategy I suggested of buying only short term bonds.
I agree that T-bills are not a good investment for the long term.
As the standard deviations for the 3 asset classes indicate, stock returns
are far more volatile than returns on bonds. If you take a smaller
assortment of stocks, which is what most people end up with, the volatility
will be even greater. Most people, if they purchase stocks for their own
portfolios, can't afford to diversify widely, and mutual fund managers don't
seem to have all that good of a track record. Some volatility wouldn't hurt
if you were prepared to hang on for the long term, it's true. And a person
could transfer their money out of stocks and into bonds at retirement age
when they want to withdraw money periodically. But what if a person reached
retirement age just as the market went into a slump of several years'
duration? Also, some of the volatility which appears negligible on a chart
translates into rather severe losses for the individual investor.
Your info comes closer to changing my mind than other stuff I've seen, Rob,
but I'd still feel queasy advising someone to put their life savings into
[mailto:firstname.lastname@example.org]On Behalf Of Rob Sweeney
Sent: Wednesday, June 07, 2000 3:48 PM
Subject: Investing (long term returns)
See, for example, http://www.dljdirect.com/hti_t01.htm , for a quick
table comparing inflation-adjusted returns for various asset classes.
Over the long run, stock strategies such as buying the S&P 500 index
whomp investments in either bonds or short-term instruments, or cash,
adjusted for inflation.
There are perhaps reasons why one might choose not to invest in US stocks,
but over the long haul, net net returns and inflation resistance aren't
them. Short term instruments (T-bills, commercial paper, cash) are
particularly poor investments over the long term, even during inflationary
periods [though less so then long-term debt during the same period if you
need to trade the bonds during the bout of inflation]).
These market behaviors are USA-specific. I don't know of any comparable
measures for non-USA investment environments but I'm sure they could be dug
up. Financial markets outside the USA have historically tended to be more
volatile (risky) for various reasons, such as lower liquidity, increased
political risk, and others.
Of course, dissenting views exist. See, for example,
http://viking.som.yale.edu/will/newsclips/5912206a.htm (Google is my
Disclaimer: I work for a Wall Street firm in asset management (but on
-- /rs Rob Sweeney email@example.com http://www.rsie.com/ Time is a warning.
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