We find that a business-cycle component of the aggregate dividend yield strongly predicts short-term aggregate dividend growth and consumption growth, whereas its low-frequency counterpart significantly forecasts long-horizon market returns. The dividend yield—the sum of these two components—has difficulty revealing variations in expected cash flow growth, because its low-frequency component tends to disguise such variations. Yet the low-frequency component has significant forecasting power for multiperiod returns at horizons of several years to as long as around 20 years, which is longer than the horizons typically exploited in prior studies that provide weak statistical evidence to challenge multiperiod return predictability.

This article evaluates out-of-sample portfolio performance for a real-time investor who can exploit time variation in the conditional mean and volatility of stock returns in optimizing a multiperiod portfolio choice problem. With the presence of parameter uncertainty, our out-of-sample analysis shows that ignoring time variation in the first two return moments leads to significant utility costs of at least 1.97% of annualized certainty equivalent return. Accounting for the time-varying risk premium plays a more important role than considering time-varying volatility in improving portfolio performance. Interestingly, behaving myopically or ignoring the hedge against changes in future investment opportunities can lead to small out-of-sample utility losses or even utility gains.

This article introduces a new holding horizon measure of active management and examines its relation to future risk-adjusted fund performance (alpha). Our measure reveals a wide cross-sectional dispersion in mutual fund investment horizons, and shows that long-horizon funds exhibit positive future long-term alphas by holding stocks with superior long-term fundamentals. Further, stocks largely held by long-horizon funds outperform stocks largely held by short-horizon funds by more than $ 3% $ annually, adjusted for risk, over the following 5-year period. We also find a clientele effect: to reduce liquidity costs, long-horizon funds attract more long-term investors through share classes that carry load fees.