Asset Allocation Decisions—Making the Choice Between Stocks and Bonds

Abstract

Given renewed interest in bonds, this article considers asset allocation decisions in the context of realized returns for bonds and stocks. The study is based on new and improved data on bond returns covering long periods of time as well as calculations of the probabilities associated with stock bond returns. An analysis of these probabilities using inflation-adjusted returns suggests that the probability of earning sizable compound rates of return with bonds is not only small, but also declines over time. Therefore, despite recent strong performance by bonds, our results suggest investors should be cautious in making asset allocation decisions.