A spatial dominance approach to evaluate the performance of stocks and bonds: Does the investment horizon matter?

The common advice by practitioners is to allocate a greater proportion of stocks for long-term investors than for short-term investors. However, part of the academic literature disagrees with this advice. We use a spatial dominance test which is suited for comparing alternative investments for a given time horizon. Using daily data for the US from 1962 to 2012, we test for dominance of cumulative returns series for stocks versus bonds at different investment horizons from 1 to 15 years. We find evidence that bonds second order spatially dominate stocks for horizons from 1 to 4 years. In contrast, for horizons of 6 years and longer, we find evidence that stocks dominate bonds. The conclusion that bonds dominate stocks at short horizons, while stocks dominate bonds at long horizons is consistent across different periods and international markets. When different portfolios of stocks and bonds are compared, we find that for long investment horizons only those portfolios with a sufficiently high proportion of stocks are efficient in the sense of spatial dominance.