Using annual return data for large-capitalization stocks and corporate bonds from 1926 through 2011, researchers from Boston College’s Center for Retirement Research studied the distribution of historic returns and then used that distribution to determine optimal consumption and portfolio asset allocation for a risk-averse household facing labor-income uncertainty and longevity risk.
Their findings reinforce the importance of allocating a substantial share of financial assets into stocks. Absent that factor, they found, investors’ “incorrect portfolio allocations reduce their lifetime utility and lifetime consumption relatively little.”
