--- Bryan D Caplan <[EMAIL PROTECTED]> wrote: > I find it interesting that there are so many more articles about bubbles > than about the underlying reality of the equity premium puzzle. This is > a nice case where a little knowledge is a dangerous thing. The average > investor would be far better off if they did think that enormous returns > could continue forever because, in a deep though less dramatic way, they > DO. I suspect that a lot of people have been turned off to stock > ownership for decades in spite of the fact that they are the smart > long-term bet.
Two reason for owning bonds in addition to stocks are: 1) the long run for stocks can be a very long run, so short-term bonds are used for funds that need to be available sooner. 2) what counts is returns after tax, and the double-taxation of dividends plus the taxation of nominal rather than real gains reduces the compounding gain. For a 50% marginal tax rate, the real wealth return on the DJIA is only about 2.5%, relative to an untaxed rate of 6.7%. Thus, a high-income person may be better off in tax-free municipal bonds after having maxed out his tax-free retirement accounts. Fred Foldvary ===== [EMAIL PROTECTED]
