Time diversification frontiers and efficiency frontiers: Implications for long-term portfolio management

Jacek Niklewski, Keith Redhead

    Research output: Contribution to journalArticle

    Abstract

    The article begins with a literature review concerning the argument that the relative risk of equities declines as the time horizon lengthens, as measured by the probability of equity returns outperforming cash and bond returns. Time diversification is one factor that ameliorates the long-run risk of stocks in that it diminishes the probability of loss as the investment horizon extends. The authors then observe that time diversification leads to the standard recommendation of financial advisors—bank deposits and bonds for short- and medium-term investments, and stocks for long-term investments. An increase in the investment horizon reduces the probability of incurring losses from equity investments; in other words, it reduces the likelihood of stocks underperforming an investment with zero real return. Likewise, a long investment horizon reduces the probability of stocks underperforming other investments with lower returns than stocks, such as bank deposits and bonds (although the probability of underperformance is greater than in the case of a zero-return investment). They conclude, however, that tocks become less risky as the investment horizon extends only for a medium-risk portfolio, such as an index fund. It may even be the case that a balanced fund (equities and bonds) has more time diversification than a 100% equity fund.
    Original languageEnglish
    Pages (from-to)31-42
    JournalThe Journal of Wealth Management
    Volume16
    Issue number3
    DOIs
    Publication statusPublished - 2013

    Fingerprint

    Efficiency frontier
    Diversification
    Portfolio management
    Equity
    Investment horizon
    Stock returns
    Literature review
    Time horizon
    Bank deposits
    Bond returns
    Cash
    Portfolio risk
    Relative risk
    Deposits
    Underperformance
    Index funds
    Real returns
    Equity returns
    Factors

    Bibliographical note

    The full text of this item is not available from the repository.

    Keywords

    • equity investments
    • portfolio management
    • risk
    • time diversification

    Cite this

    Time diversification frontiers and efficiency frontiers: Implications for long-term portfolio management. / Niklewski, Jacek; Redhead, Keith.

    In: The Journal of Wealth Management, Vol. 16, No. 3, 2013, p. 31-42.

    Research output: Contribution to journalArticle

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