Time Diversification and Contributions

Abstract

The time diversification debate examines the relationship between risk and investment horizon. The debate has generally considered wealth to be a function only of returns. This paper considers the practicalities of this assumption (particularly in light of the broader pension finance debate) by examining two further accumulation models. Our findings reveal that one particular variable - contributions - significantly impacts terminal wealth. Furthermore, we find that measures proposed as ways of studying time diversification generally ignore the influence of contributions. If the time diversification debate is truly about the risks of long term investing, considering realistic accumulation models should be the first step to understanding the relationship between risk and investment horizon.