The Argument for Bonds in Strategic Asset Allocation
28 Pages Posted: 24 Jul 2020
Date Written: June 22, 2020
Abstract
A number of well-known practitioners such as Warren Buffett and Jeremy Siegel have long advocated a strategic asset allocation in which investors hold a majority of their assets in equities. However, in this simple straightforward study we find that in order to maximize the well-known Sharpe ratio, most investors over the period 1995-2019 would have been better off holding a majority of their assets in bonds rather than stocks. While interest rates have decreased during this twenty-five year period and thus enhanced bonds relative returns, our results are quite convincing. Even though our results are obviously ex post, investors very often make decisions on future investment based on past performance and thus our results could provide guidance to investors for future investing decisions.
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