Bonds Versus Stocks: Investors' Age and Risk Taking

Journal of Monetary Economics, Vol. 56, No. 6, pp. 817-830, September 2009

40 Pages Posted: 18 Oct 2006 Last revised: 27 Feb 2012

See all articles by Turan G. Bali

Turan G. Bali

Georgetown University - Robert Emmett McDonough School of Business

K. Ozgur Demirtas

Sabanci University Graduate School of Management

Haim Levy

Hebrew University of Jerusalem - Jerusalem School of Business Administration; Fordham University

Avner Wolf

Baruch College

Abstract

This paper examines the proportion of wealth invested in stock and bond portfolios as a function of the investors' age, i.e., investment horizon. It has become increasingly popular to advice investors to relocate their funds from a primarily stock portfolio to a primarily bond portfolio as they get older. However, the existing theory does not support this advice: the well-known decision rules such as Mean-Variance (MV) or Stochastic Dominance (SD) rules are unable to explain this common practice. In this paper, we utilize the recently developed Almost Stochastic Dominance (ASD) and Almost Mean Variance (AMV) approaches and employ various datasets to examine the dominance of stock and bond portfolios as a function of the investment horizon. We find that, for short investment horizons, all portfolios are efficient. However, for medium and longer horizons, only the portfolios with higher stock proportions are efficient. The results indicate that ASD and AMV rules unambiguously support the popular practice of advising higher stock to bond ratio for long investment horizons. Hence, we provide an explanation to the practitioners' recommendation within the expected utility paradigm.

Keywords: Asset Allocation, Life-Cycle Funds, Almost Stochastic Dominance, Almost Mean-Variance

JEL Classification: G10, G11, G12, C44, D81

Suggested Citation

Bali, Turan G. and Demirtas, K. Ozgur and Levy, Haim and Wolf, Avner, Bonds Versus Stocks: Investors' Age and Risk Taking. Journal of Monetary Economics, Vol. 56, No. 6, pp. 817-830, September 2009, Available at SSRN: https://ssrn.com/abstract=936648

Turan G. Bali

Georgetown University - Robert Emmett McDonough School of Business ( email )

3700 O Street, NW
Washington, DC 20057
United States
(202) 687-5388 (Phone)
(202) 687-4031 (Fax)

HOME PAGE: https://sites.google.com/a/georgetown.edu/turan-bali

K. Ozgur Demirtas (Contact Author)

Sabanci University Graduate School of Management ( email )

Sabanci University, School of Management
Orhanli Tuzla
Orhanlı-Tuzla, Istanbul, 34956
Turkey
(+90) 216-483-9985 (Phone)
(+90) 216-483-9699 (Fax)

Haim Levy

Hebrew University of Jerusalem - Jerusalem School of Business Administration ( email )

Mount Scopus
Jerusalem, 91905
Israel

HOME PAGE: http://pluto.huji.ac.il/~mshlevy/

Fordham University ( email )

140 West 62nd Street
New York, NY 10023
United States

Avner Wolf

Baruch College ( email )

One Bernard Baruch Way
New York, NY 10010
United States

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