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A case for equities

It's reasonable for many investors to have huge equity exposure - but not, perhaps, for the reason you might think.
A case for equities
  • Conventional economics suggests investors should hold only a low proportion of their wealth in equities. 
  • Investors actually heed this advice, because our wealth includes capitalised pension income, which is huge. 

Many investors should invest a lot in equities – but not for the reasons you might think.

To see why, let’s start in 1969. Back then Robert Merton, who was later to win a Nobel prize, proposed a simple equation to tell us how to divide our wealth between equities and safe assets. The proportion you put into equities, he showed, should be equal to the expected annual outperformance of equities over cash, divided by a measure of risk aversion multiplied by the square of the volatility of equities.

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