Good Investors Study History Along with Math
Albert Einstein defined insanity as doing the same thing over and over again while expecting different results.
Most people intuitively agree.
Despite that knowledge many traders fail to learn from well-documented historical experience. The chart below shows the nominal, after-inflation and real (tax + inflation adjusted) total returns on stocks, bonds and cash. Those results cover the 86 years ended Dec. 31, 2012.
Fixed income registered unexciting but slightly positive real returns. At their long-term growth rate of just 0.6% it would take about 120 years to double your after-tax, inflation-adjusted buying power.
Note: The second 60 years seem to fly by much faster than the first 60.
"Money in the bank" was anything but. The long-term real rate of return on cash was decidedly negative. Equities proved to be the clear winner. True believers doubled their after-tax, inflation-adjusted buying power every 16 years.
Advisors that recommend keeping 10% to 20% of your nest egg in cash at all times are sentencing that portion of your net worth to permanent "no-growth" status. The reduced volatility might make you feel more secure while simultaneously impeding your chance for success.
Why bet on asset classes that have proven to be poor performers? History tends to repeat itself.
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