Buy-and-Hold and Constant-Mix May Be Better Allocation Strategies Than You Think

Given mean-reverting equity and interest rate uncertainty, this article shows a relatively low economic cost of using a simple allocation strategy, buy-and-hold or constant-mix, instead of optimal reallocation. Moreover, given the decision to use one of the simple allocation strategies, the article identifies (1) which investors will be better off with buy-and-hold than with constant-mix, and vice versa, and (2) which investors will be better off with a horizon-maturity fixed-income position than with a sequence of short-maturity ones, and vice versa. The article uses illustrations in a three-period binomial model to bridge the academic/practitioner gap and provide useful insights to those interested in applied investment management.