Interesting report titled “MYTH: Time reduces risk” by Ineichen Research & Management:
Some academic finance literature suggests that time diversifies risk, meaning that investing for the long term reduces risk. Disciples of buy-and-hold strategies also believe in the idea of time diversification. The logic is that if one has a very long investment horizon, one can recover from large losses. The counter argument is that time actually amplifies risk. The logic here is that over the longer term, more bad things can happen and the probability of failure and destruction is higher.
We think time diversification is a myth. Time amplifies risk. It is true that the annual average rate of return has a smaller standard deviation over a longer time horizon. However, it is also true that the uncertainty compounds over a greater number of years. Unfortunately, the latter effect dominates in the sense that total return becomes more uncertain the longer the investment horizon. Furthermore, betting on the long term might not be applicable for most investors. After all, the long term is nothing else than many short-term periods joined together.
I think there is a fair amount of confusion between what “long-term investing” entails and “buy-and-hold-forever” type of investing and investors get into all sorts of trouble because of that. (here)
Also, the paper talks about diversification being the only free lunch. But the problem is best described by Howard Marks (here):
- If you concentrate your portfolio, your mistakes will kill you.
- If you diversify, the payoff from your successes will be diminished.
You should read the entire article:
