Stocks for the Long Run
- By Sam van de Schootbrugge
- 6 min read
Summary
• A new Journal of Banking and Finance paper uses Stochastic Dominance to show stocks yield dominant returns over bonds in the long run.
• The caveat is that a portfolio of equities or risky bonds (or both) must include a risk-free asset, such as TIPS, for the result to hold.
• Over an investment horizon of 15 years or more, the dominant asset allocation strategy is to have a stocks-bonds ratio of at least 60:40 in favour of equities, as long as a risk-free asset is included.
Introduction
Do stocks outperform bonds in the long run? Yes, according to a recently published paper in the highly rated Journal of Banking and Finance. It states that ‘any investor would be better off investing in stocks rather than in risky bonds, as long as the portfolio included a riskless asset – a Treasury Inflation-Protected Security (TIPS)’.
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