As we age, should we 'cut back' on equities?

We've long maintained that the investor should tilt their asset allocation away from stocks as they grow older. Professor, Jeremy Siegel in his book "Stocks for the Long Run"argues a contrasting view. However, a recent article by University of Chicago's Lubos Pastor and University of Pennyslvania's Robert F. Stambaugh in The Journal of Finance, "Are Stocks Really Less Volatile in the Long Run?" suggests that we rethink the use of stocks in our retirement planning, even for distant time horizons. Here's the abstract:

According to conventional wisdom, annualized volatility of stock returns is lower over long horizons than over short horizons, due to mean reversion induced by return predictability. In contrast, we find that stocks are substantially more volatile over long horizons from an investor's perspective. This perspective recognizes that parameters are uncertain, even with two centuries of data, and that observable predictors imperfectly deliver the conditional expected return. Mean reversion contributes strongly to reducing long-horizon variance, but it is more than offset by various uncertainties faced by the investor, especially uncertainty about the expected return. The same uncertainties reduce desired stock allocations of long-horizon investors contemplating target-date funds.

View Full Article (pdf).