TY - JOUR T1 - The Argument for Bonds in Strategic Asset Allocation JF - The Journal of Wealth Management DO - 10.3905/jwm.2021.1.150 SP - jwm.2021.1.150 AU - Aron Gottesman AU - Matthew Morey Y1 - 2021/09/14 UR - https://pm-research.com/content/early/2021/09/14/jwm.2021.1.150.abstract N2 - A number of well-known practitioners such as Warren Buffett and Jeremy Siegel have long advocated a strategic asset allocation in which investors hold a majority of their assets in equities. However, in this simple straightforward study of investable indices we find that in order to maximize the well-known Sharpe ratio, most investors over the period 1995–2019 would have been better off holding a majority of their assets in bond indices rather than stock indices. While interest rates have decreased during this twenty-five-year period and thus enhanced bond relative returns, our results are quite convincing. Even though our results are obviously ex post, investors very often make decisions on future investment based on past performance and thus our results could provide guidance to investors for future investing decisions.TOPICS: Wealth management, passive strategies, portfolio construction, statistical methodsKey Findings▪ In order to maximize the Sharpe ratio, most investors over the period 1995-2019 would have been better off holding a majority of their assets in bond indices rather than stock indices.▪ For a portfolio at the 4% annualized standard deviation level, the percentage that should have been held in a U.S. aggregate bond index over the time period studied is 79% on average. As the risk level increases, the percentage held in the U.S. bond index decreases substantially in favor of investing in an emerging market bond index. For a portfolio at the 10% annualized standard deviation level, the percentage that should have been held in an emerging market bond index is approximately 63% on average.▪ Bond indices, whether they be domestic or emerging markets indices, should have been a much larger proportion of one’s portfolio than is often stated by finance professionals and commentators. ER -