This destroys the “stocks are less risky in the long term” narrative. Something I never even thought about actually.
I’m reading this paper, “Are Stocks Really Less Volatile in the Long Run?” by a couple professors. They make the argument that if stocks are actually LESS volatile in the long run, then why do target date funds become MORE bond heavy in…the long run???
“investors always optimally choose downward-sloping glide paths. This choice is not driven by mean reversion; Instead, the driving force is that future expected returns are unknown and likely to be persistent.
The future values become increasingly uncertain from the perspective of investors (over more time). As a result, the future returns become increasingly volatile from the investors’ perspective. In other words, investors perceive distant future returns to be more volatile than near-term returns.
Facing the need to predetermine their future allocations, investors commit to invest less in stocks in the more uncertain distant future. This simple logic shows that neither mean reversion nor human capital are necessary to justify downward-sloping glide paths. If investors must commit to a fixed schedule of future stock allocations, they will choose lower allocations at longer horizons simply because they view single-period stock returns as more volatile at longer horizons.”