Question

There is an expansive misuse of Paul Samuelson's findings on time diversification. Explain the time diversification concept and the sources of any potential confusion.

Answer 1

Time diversification is the belief that risk reduces over longer investment horizons. It states that younger investors should hold more stock in their portfolios as they have more time for future good years to offset bad years.

But there are few confusions surrounding this thought process. Stocks aren't necessarily a better choice based on a long time horizon. Paul Samuelson himself has shown that if returns are not negatively serially correlated, investment risk does not decline over longer horizons. The published empirical literature finds that returns are slightly negatively serially correlated but not enough so for risk to decline over longer time horizons.