What is the best portfolio for a university endowment (i.e., a portfolio with a really long time horizon)? In 1994 Thaler and Williamson argued that a portfolio composed of 100% equities was a better investment than a 60% equities and 40% bonds (60/40) investment strategy because of the higher long-term rate of return.¹ In 1996 Asness challenged that notion, arguing in favor of a (60/40) portfolio.² In this post I update the data used in Asness’ 1996 paper to see if his argument still holds.

Asness argued that recommending 100% equities ignores the benefits of diversification, and even a long-term investor who wishes to take more risk should generally not own 100% equities. He argued that an investor, regardless of risk, should invest in the optimal portfolio.

Exhibit 1 shows the data from Asness’ paper and Exhibit 2 shows the data updated through 2015.³

Based on the data in the 1994 paper, the 60/40 portfolio earned the highest return per unit of risk. The 2014 data tells the same story, although it is interesting to note that 100% bonds surpassed 100% stocks in the 2014 data.

Asness notes in his paper that a long-term investment in a 60/40 portfolio may or may not take enough risk for a long-term investor. An investment in 100% equities (100% S&P 500 Index in this case) almost certainly is not an efficient portfolio and ignores the benefits of diversification.

By Sheldon McFarland
¹Thaler, Richard H., and J. Peter Williamson, College and University Endowment Funds Why Not 100% Equities?, The Journal of Portfolio Management, Fall 1994, Vol. 21, No. 1: pp. 27-37.
² Asness, Clifford S., Why Not 100% Equities, The Journal of Portfolio Management, Winter 1996, Vol. 22, No. 2, pp. 29-34.
³Stocks are represented by the S&P 500. Bonds are represented by the Ibbotson total return series for long-term corporates. The 60/40 portfolio is a combination of 60% the S&P 500 and 40% long-term corporates, rebalanced back to 60/40 every month. The compound return is the annualized total return from each strategy, assuming monthly returns are reinvested in the strategy. The standard deviation is the annualized standard deviation of monthly returns over the stated period.
Diversification neither assures a profit nor guarantees against loss in a declining market.
Past performance does not guarantee future results and the principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost.
All investments involve risk, including the loss of principal and cannot be guaranteed against loss by a bank, custodian, or any other financial institution.