Stocks or Bills in the Long Run Evidence from the US and Swedish Asset Markets

The foremost allocation problem for long-term investors is the division between stocks and bills. In this paper the investor follows a mean-variance criterion for buy-and-hold strategies. A non-parametric bootstrap approach is used to investigate if portfolio weights for stocks and bills vary in systematic manner with the investment horizon. In this approach it is also possible to study the impact of estimation risk, and its variation across investment horizons and risk levels. The historical data is U.S. and Swedish real returns for a well-diversified portfolio of stocks and a short-term fixed income asset from 1900 to 1997 and 1919 to 1999. The results show that the investor should pursue time diversification: the weights for stocks in efficient portfolios are significantly higher for long investment horizons compared to a one-year horizon and the differences are of economic importance.