Re: how to compare living standards

On Thu, 20 Apr 2006 12:47:11 -0500, "Jim Blair" <jeb@xxxxxxxx> wrote:

"William F Hummel" <wfhummel@xxxxxxxxxxx> wrote in message
news:q2nd42hnjgnni01lh0shmo9p9ffckblgu1@xxxxxxxxxx

If your investment horizon is at least 15 years, there is very little
gamble in a broad-based equity index fund. You are likely to be way
ahead of any fixed-income investment.

I wish you had told me that 40 years ago.

Sorry I didn't tell you about this earlier :-) Forty years ago I
didn't know it myself.

I suspected the investment horizon for which that would be true was in
the 10 to 20 year range but didn't have the data to verify it. About
11 years ago I found a book titled "Stocks, Bonds, Bills, and
Inflation, Market Results for 1926 to 1994" by Ibbotson Associates.
That's a period of 69 years which includes the Great Depression and
two major recessions. The book is issued annually with updates, if
anyone is interested.

My web page at http://wfhummel.net/stocksbonds.html shows the data on
which I based my earlier statement. The average annualized return
over any 15 year interval was about 10% for large company stocks, 6%
for long term T-bonds, and about 4% for T-bills. None had a negative
return over that period. Using those averages, $10,000 invested for
15 years would grow in value to $41,800, $24,000, and $18,000
respectively.

The comparison is much more impressive if you assume a 40 year
investment period: $453,000, $103,000, and $48,000 respectively.
These figures apply to investments in a tax-deferred vehicle like an
IRA. If the returns are taxed annually, the gains would be lower.

However it should be noted that equities have an advantage in that
case because most of their gain is in price appreciation which is not
taxed until sold and then enjoys the lower tax rate on long term
capital gains. There is essentially no price appreciation on bonds
and bills over the long term. This capital gains tax advantage for
equities disappears in an IRA because all distributions are taxed as
ordinary income.
.

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