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.