Time diversification is the holding of an investment over a long period of time and thereby achieving a diversification of annualised return over time. It is often said that time diversification helps to improve your investment returns. At one point in time, I was an ardent fan of time diversification. However, after thinking further about it, I realised that time diversification, while not totally irrelevant, is quite irrelevant. Let's take a closer look on the case of time diversification.
Using the historical returns of the Straits Times Index from end-1984 till end-2012 as the base data, we can construct the annualised return over different holding periods.
|
Annualised Returns Over Different Holding Periods |
As can be seen in the figure above, the annualised return over a 1-year holding period can vary greatly from +78% to -49%. Anybody holding shares during the worst 1-year period would have suffered a great loss. Over ...
...