C of E
Glad to see this has stirrred up such a good debate.
Unlike Sea Pigeon, I do accept that equities will probably provide the best returns over the long-term. I do agree with him, however, that having got a lot of that return in the 1990s, there may be less of it around going forward.
However, my main concern is there here and now rather than the danger that there has been some kind of paradigm shift. Equity investments comprise other risks than simply volatility. There is the risk of capital loss, which has hurt many investors (even well-diversified ones) over the past two years. There is the risk of changing your mind, or of circumstances forcing you to. There is the risk of not sleeping at night, or giving yourself an ulcer worrying about your investments. There is the risk of panicking, or being panicked, out of equities at an inopportune time.
The reason I would (and do) put some of my assets into categories other than equities is for diversification. Not having all your eggs in one basket applies equally to assets as to stocks, sectors, and currencies. Sure you'll never do as well as the best single category, but you'll spread the risks of being wrong, and that seems a rational strategy to me for the typical investor. Property may perform well (as recently) even though equities are not. The yield from gilts (or cash) may be a useful buffer when equity markets tumble. If sleeping at night or not getting an ulcer is important to you, then you should build it into your investment mandate.
Monksfield - yes, I accept you could construct such a mixed portfolio yourself. But why would you want the hassle of doing so, and of monitoring and shifting the mix constantly, when you can do so cheaply and effectively using a balanced fund. If you don't trust any single investment manager, then use a consensus fund which samples all of them.
Brendan - yes, if you have other diversified assets, then by all means invest only in equities. Your house isn't an investment, though, any more than a holiday home is. Less so, in fact.
Monksfield - if the sophisticated investor has moved on, then why do pension funds (not just in Ireland but also in the US and UK), which are well-advised and have longer timeframes and more predictable liabilities than most individual investors, still hold a balanced spread of assets (with a strong bias towards equities, certainly).
Finally, even if Monksfield's demographic argument is correct, given that the details are readily available to investors, shouldn't an efficient equity market have already priced in the likely effect of it on stock prices ? A large part of what has proved to be 'irrational enthusiasm' in the US market in recent years was justified by the 'everyone will be buying till 2020 argument', I seem to recall. And at what point will an efficient market work out that everyone will be selling after 2020 and reflect that in stock prices too.
Just some random thoughts after a hard day. Sorry if they're a bit jumbled. Maybe all this means is that I am a more risk-averse investor than either Brendan or Monksfield, but I don't think that's all there is to it.