Introduction

Our site has cautioned investors that it is foolhardy to invest in equities money you know you will need in the next 5 years; for us, this would be closer to gambling then to investing. We also caution that, although in the very long run equities outperform bonds, there is no certainty in life and all investors should have an appropriate portion of their portfolio in bonds; for more, see Asset Allocation on our site, and Arnott Why bonds? doc.1417N. The up’s and downs of the past 10 years have been a wake-up call for many investors, who want to know just how patient they need to be to realize their expected equity reward.

We thought it was timely to bring to our readers’ attention a US paper written in 2005 which in effect anticipated the possibility of a dramatic market decline, such as the one which occurred in 2008, offsetting gains realized over many previous years. Pu Shen is a senior economist at the Federal Reserve Bank of Kansas City. Jonathan Corning, an associate economist at the bank, helped prepare the article. Shen published in 2005 an article entitled How Long Is a Long-Term Investment doc.1416. The article can also be found on the bank’s website at www.kansascityfed.org.

Here are some key quotes from the paper; see also PrefBlog.com doc.1418 for its comments on the paper. Although it was written for a US audience and looks at the US stock market and US government bond returns during the period 1926 to 2002, the message is relevant to investors everywhere.