The commonly recommended 60–40 stock–bond allocation may not be appropriate for all investors. This study identifies optimal stock–bond allocations for different risk–return objectives, investment horizons, and target returns. The stock proportions of optimal portfolios increase with the investment horizon and target return across all investor objectives studied. The Sharpe ratio and risk premium–semideviation ratio are maximized by investing mostly or fully in stocks for horizons of 10 to 20 years. Optimal portfolios based on the Sortino ratio allocate 69% to stocks for a 10-year horizon and 100% for 15- to 20-year horizons for the Treasury returns target. For higher return targets—those of bonds and the 60–40 stock–bond portfolio—maximizing the Sortino ratio requires investing fully in stocks for all horizons. For investors minimizing downside risk below the three target returns, the stock proportions of optimal portfolios also increase with the investment horizon, from 14% to 19% for a one-year horizon to 94% to 100% for 20-year horizon.
Hong et al. (Fri,) studied this question.