Buy-and-Hold and Constant-Mix May Be Better Allocation Strategies than You Think

Abstract

Given mean-reverting equity and interest rate uncertainty, this study shows a relatively low economic cost of using a simple allocation strategy, buy-and-hold or constant-mix, instead of optimal reallocation. Moreover, given the decision to use one of the simple allocation strategies, the study identifies (1) which investors will be better off with buy-and-hold than constant-mix, and vice versa; and (2) which investors will be better off with a horizon-maturity fixed-income position than a sequence of short-maturity ones, and vice versa. The study uses illustrations in a three-period binomial model to “bridge the academic/practitioner gap” and provide useful insights to those interested in applied investment management.

Keywords: buy-and-hold; constant-mix; dynamic allocation; mean reversion; optimal reallocation

JEL Classification: G11