On the Risk of Stocks in the Long Run

A familiar proposition is that investing in common stocks is less risky the longer an investor plans to hold them. If this proposition were true, then the cost of insuring against earning less than the risk-free rate of interest should decline as the investment horizon lengthens. This paper shows that the opposite is true, even if stock returns are mean reverting in the long run. The case for young people investing more heavily than older people in stocks cannot, therefore, rest solely on the long-run properties of stock returns. For guarantors of money-fixed annuities, the proposition that stocks in their portfolios are a better hedge the longer the maturity of their obligations is unambiguously wrong.