Investing for the Long Run when Returns are Predictable

We examine how the evidence of predictability in asset returns a ects optimal portfolio choice for investors with long horizons. Particular attention is paid to estimation risk, or uncertainty about the true values of model parameters. We nd that even after incorporating parameter uncertainty, there is enough predictability in returns to make investors allocate substantially more to stocks, the longer their horizon. Moreover, the weak statistical signi cance of the evidence for predictability makes it important to take estimation risk into account; a long-horizon investor who ignores it may over-allocate to stocks by a sizeable amount. Graduate School of Business, University of Chicago. I am indebted to John Campbell and Gary Chamberlain for guidance and encouragement. I also thank an anonymous referee, the editor Ren e Stulz, and seminar participants at Harvard, the Wharton School, Chicago Business School, the Sloan School at MIT, UCLA, Rochester, NYU, Columbia, Stanford, INSEAD, HEC, the LSE, and the London Business School for their helpful comments.