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these are all great questions. i'll take a short stab at them.

first a point of clarification, because in this business there seems to be a high level of obsfucation. i use the term nominal return to describe the returns pre-inflation and pre-tax, real return to describe the return adjusted for inflation, but not for tax, and ultimate return to describe the return adjusted for inflation and tax.

The longer I invest in either cash or equities, the lower the risk involved.

that has historically been true with equities, i'm not sure you can say the same with "cash". in depends of course what you define as "cash". cash in the mattress obviously loses purchasing power. cash in short term, high quality paper (90 day tbills, money market fund) has in the US historically had a positive real return, but not necessarily a positive ultimate return. for example, 5% interest in a 3% inflation environment at a 40% tax rate (state and federal combined) produces no ultimate return at all to an investor and any tax rate higher produces a negative ultimate return.

@40% - tax burden is equal to 2% interest (0.4*.05). and inflation takes 3% of your capital, so in effect your ultimate return is zero.

Is there any data available comparing the real returns on equities and bonds over the past 100 years or so ?

yes, Jeremy Siegel's book, "Stocks for the Long Run" and Shiller's (Harvard) papers and recent book "Irrational Exuberance" (sp?). Shiller and/or his students maintain a website which i do not have the link for, where you can download an excel spreadsheet with historical data on equities. I highly recommend Siegel's book. although i don't necessarily agree with his recommendations at the end of the book, it is a reliable benchmark study that focuses on real returns, and as a bonus, it has a chapter with historical federal tax rates since the Wilson administration.

One note on the typical numbers that you see for real return with dividends re-invested. the naysayers are right to point out that the numbers often quoted (including by Dr. Siegel at Wharton) are factual, but incorrect in a real world sense. dividends have made up a large part of the historical total real return from investing in equities, and nobody to my knowledge has attempted to estimate actual ultimate returns to investors, including taxes. it wasn't until the late 1960's, that the NYSE and the major brokerage houses offered fractional share dividend re-investment. the NYSE for years taxed odd lot transactions (transactions that were in multiples of 100 shares), and to my recollection it wasn't a small fee either - i think it was on the order of 10-15 bucks per transaction. when i started in this business in the early 1980's commissions at a discount broker like schwab were a minimum of 65 bucks. also, true index funds were not readily available to the 1970's. so in reality, i suspect that even for wealthy investors, taxes and fees probably ate up about 1/3 to 1/2 of the total dividends, and since index funds were not readily available, even well managed accounts had some capital gains tax from turnover. so i suspect that ultimate returns from equities historically were about 2-2.5% (annually) less than the theoretical real return numbers. for bonds it's worse because, at least for the 1900-1982 period, all of the real return came from dividends (interest rates and inflation rose during that period).

you have some other great questions but i've run out of time for now.

good to see that the subject of "risk" hasn't totally fallen off people's radar screen. i think the subject is very important and have been a bit surprised, given what happened in the financial markets the past three years, that this board hasn't been more active. i posted here this week just to see if anyone was still looking this way at all.

good luck.

tr
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