Why higher equity allocation is optimal for long-term investors?

Many investors have carried their exposure to stocks through 2008 in the hope that these stocks would generate positive returns if they hold on longer.

If their hopes have indeed come true, there is a lesson for long-term investors: construct portfolios with higher equity allocation.

But are stocks less risky over the long term?

This article explains time diversification ā€” the notion that the risk of stocks declines as time horizon increases.

It discusses why experts are still divided on the subject. It then suggests why it is optimal for investors to carry higher equity allocation without engaging in time diversification.

Long-term investment is typically an after-thought. Or to be precise, it is usually a short-term investment that has turned wrong!

But does extending the time horizon help? Jeremy Siegel in his book ā€œStocks for the long runā€ states that stocks produced positive real returns in excess of both bonds and Treasury bills over longer time horizons.

Intuitively then, extending time horizon makes sense. Suppose a portfolio was set-up in October 2003 with the objective of doubling capital in five years. The portfolio would have fallen short by seven percentage points in October 2008. Extending the investment horizon by a year would have served the objective.

Click here fo the full story.

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