Stocks versus Bonds and the Investment Horizon
40 Pages Posted: 3 Oct 2019 Last revised: 28 Jan 2020
Date Written: September 24, 2019
Many investors and institutions have a long-run investment perspective, hence the question of stocks versus bonds in the long-run is of central importance. Despite the great deal of research attention devoted to this issue, views remain conflicting. Indeed, neither stocks nor bonds dominate when compared in isolation, but we show that incorporating into the analysis the long-term riskless asset (TIPS) offers a clear-cut resolution. For any horizon greater than 3 years, stocks dominate bonds by First-degree Stochastic Dominance with a Riskless asset (FSDR). This implies that for any combination of bonds with TIPS, there exists a combination of stocks with TIPS that dominates it for any investor with non-decreasing preferences. Thus, the dominance of stocks over bonds for the long-run holds not only for expected utility maximizers, but also for Prospect Theory investors and investors with various aspiration levels as well.
Keywords: stocks versus bonds, investment horizon, First-degree Stochastic Dominance with a Riskless asset (FSDR)
JEL Classification: G11, G12
Suggested Citation: Suggested Citation