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B. G., Opalesque Geneva:

With equity indices breaking all records, it may be reasonable to wonder if investors should go all in on equities.

A paper by three U.S. academics that came out in October suggests just that. Using data going back to 1890, they challenge the tenets that investors should diversify across stocks and bonds and that the young should hold more stocks than the old. A mix of domestic and international stock held throughout one's lifetime, they argue, vastly outperforms these strategies.

Cliff Asness, co-founder of AQR Capital, a global quant hedge fund manager, wrote in a blog earlier this month that this idea of investing 100% in stocks is not new and has been refuted several times. He concedes that equities winning long-term vs. bonds is what is supposed to happen. "It's finance 101," he says.

The premise of the three authors is that the asset with a higher expected return (stocks) has, on average, a higher realised return. However, they have overlooked the higher return based on the risk taken, Asness says. "I don't know anyone who thinks a portfolio of stocks and bonds has a higher unconditional expected return than 100% stocks. We prefer a diversified portfolio because we believe it has a higher return for the risk taken, not a higher expected return.......................

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