On the Risk of Stocks in the Long Run
Posted: 23 Aug 2001
This paper examines the proposition that investing in common stocks is less risky the longer an investor plans to hold them. If the proposition were true, then the cost of insuring against earning less than the risk-free rate of interest would decline as the length of the investment horizon increases. The paper shows that the opposite is true even if stock returns are "mean-reverting" in the long run. The case for young people investing more heavily in stocks than old people cannot therefore rest solely on the long-run properties of stock returns. For guarantors of money-fixed annuities, the proposition that stocks are a better hedge the longer the maturity of their obligations is unambiguously wrong.
Keywords: Stocks in the long run, hedge, hedging, inflation hedge
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