Time Diversification Redux

Abstract

Conventional risk measures may not accurately describe the volatility investors actually experience, especially for portfolios servicing their retirement spending needs. Return volatility rises as its calculated holding period nears 1 year and falls as it lengthens to 10 years. Lower volatility at longer holding periods implies that longer-term mean reversion exists. A portfolio achieves the greatest extra-return benefit by rebalancing over the holding period of highest volatility. Time diversification is helpful, up until long-term uncertainty about the value of reinvested cash flows from dividends leads to rising volatility.