The writer is a former global head of asset allocation at a fund managerReturns from equities have been so consistently and implausibly higher than government bonds over long time horizons that the phenomenon earned a name: the equity premium puzzle.
Despite this, few investors are willing to place all their chips on red. Typically, they or their regulator lack the stomach for stocks’ extreme valuation swings or do not have confidence in the persistence of historic market trends. Furthermore, belief that things will probably work out for markets in the long-run is little comfort to investors with short-run cash needs.
For this reason, investors build multi-asset strategic asset allocations, sometimes known as policy benchmarks. And this is the biggest investment decision an investor will make.