A Case for Bonds

I stumbled on this the other day looking for research on the inflation adjusted (real) return on the market over longer periods of time, up to and including recent times.  I found this page from Mathematics Professor Krzysztof Burdzy of the University of Washington to be of interest.  I am reposting it in case it were ever removed, but am providing a link to the original page here.  All text and images below are from the original site. (http://www.math.washington.edu/~burdzy/dowjones.php)

Free Financial Advice

Are you fortunate to be a young person planning to retire in 30 years? All financial advisers will tell you to invest in the stock market now and enjoy wealth when you retire. Here is a simple and rough estimate of your future fortune.

Consider the Dow-Jones Industrial Index data from 1928-2008 (annual averages), and put them on the logarithmic scale (see Figure 1). Perform linear regression on these data and find the 95% confidence interval in 2038. See the regression line and the endpoints of the confidence interval in Figure 1.

If you invest 10,000 dollars now, you will have between 27,000 dollars and 131,000 dollars in 2038. The return on your investment will be between 170% and 1,200%, with probability 95%.

Figure 1

The naysayer version – free advice from 100% certified skeptical financial adviser.

Consider the Dow-Jones Industrial Index data from 1928-2008 (annual averages), and express them in constant dollars using the Consumer Price Index (see Figure 2). Perform linear regression on these data and find the 95% confidence interval in 2038. See the regression line and the endpoints of the confidence interval in Figure 2.

If you invest 4,000 dollars now, you will have between 3,800 dollars and 8,000 dollars in 2038. The return on your investment, in real terms, will be between 5% loss and 100% gain, with probability 95%.

Figure 2

Source: http://www.math.washington.edu/~burdzy/dowjones.php

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