What Practitioners Need to Know... About Time Diversification
Although an investor may be less likely to lose money over a long horizon than over a short horizon, the magnitude of a potential loss increases with the length of the investment horizon.
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| Published in | Financial analysts journal Vol. 71; no. 1; pp. 29 - 34 |
|---|---|
| Main Author | |
| Format | Journal Article |
| Language | English |
| Published |
Charlottesville
CFA Institute
01.01.2015
Taylor & Francis Ltd |
| Subjects | |
| Online Access | Get full text |
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| Abstract | Although an investor may be less likely to lose money over a long horizon than over a short horizon, the magnitude of a potential loss increases with the length of the investment horizon. |
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| AbstractList | The notion that above-average returns tend to offset below-average returns over long horizons is called time diversification. Specifically, if returns are independent from one year to the next, the standard deviation of annualized returns diminishes with time. The distribution of annualized returns consequently converges as the investment horizon increases. Several economists have argued that the notion of time diversification is specious because, although investors are less likely to lose money over a long horizon than over a short one, the magnitude of one's potential loss increases with the duration of the investment horizon. However, there are several reasons why investors might still condition their risk exposure on their time horizon, even though they accept the mathematical truth that time does not diversify risk. For example, they might believe that the extremely bad outcomes required to justify the irrelevancy of time diversification would result from conditions that would have equally dire consequences for the so-called riskless asset. Although an investor may be less likely to lose money over a long horizon than over a short horizon, the magnitude of a potential loss increases with the length of the investment horizon. |
| Author | Kritzman, Mark |
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| Copyright | 2015 CFA Institute Copyright CFA Institute Jan/Feb 2015 |
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| Snippet | Although an investor may be less likely to lose money over a long horizon than over a short horizon, the magnitude of a potential loss increases with the... The notion that above-average returns tend to offset below-average returns over long horizons is called time diversification. Specifically, if returns are... |
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| SubjectTerms | Confidence intervals Diminishing marginal utility Diversification Down payments Economic theory Financial management Index funds Investment analysis Investments Portfolio diversification Rates of return Return on investment Risk exposure Risk management Standard deviation Stocks Studies Time |
| Title | What Practitioners Need to Know... About Time Diversification |
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