Optimal Portfolios for the Long Run

26 Pages Posted: 6 Sep 2013 Last revised: 5 Feb 2014

See all articles by David Blanchett

David Blanchett

Morningstar Investment Management

Michael S. Finke

The American College

Wade D. Pfau

The American College for Financial Services; McLean Asset Management

Date Written: September 4, 2013


There is surprisingly little agreement among academics about the existence of time diversification, which we define as the anomaly where equities become less risky over longer investment periods. This study provides the most thorough analysis of time diversification conducted, using 113 years of historical data from 20 countries (over 2,000 years of total return data). We construct optimal portfolios for 20 different countries based on varying levels of investor risk aversion and time horizons using both overlapping and distinct historical time periods.

We find strong historical evidence to support the notion that a higher allocation to equities is optimal for investors with longer time horizons, and that the time diversification effect is relatively consistent across countries and that it persists for different levels of risk aversion. We also note that the time diversification effect increased throughout the 20th century despite evidence of a declining risk premium. Although time diversification has been criticized as inconsistent with market efficiency, our empirical results suggest that the superior performance of equities over longer time horizons exists across global equity markets and time periods.

Keywords: time diversification, portfolio choice, stock allocation

JEL Classification: G11, G15

Suggested Citation

Blanchett, David and Finke, Michael S. and Pfau, Wade D., Optimal Portfolios for the Long Run (September 4, 2013). Available at SSRN: https://ssrn.com/abstract=2320828 or http://dx.doi.org/10.2139/ssrn.2320828

David Blanchett

Morningstar Investment Management ( email )

22 W Washington
Chicago, IL 60602
United States
859-492-5637 (Phone)

HOME PAGE: http://www.davidmblanchett.com

Michael S. Finke (Contact Author)

The American College ( email )

Bryn Mawr, PA 19010
United States

Wade D. Pfau

The American College for Financial Services ( email )

630 Allendale Rd
King of Prussia, PA 19406
United States

HOME PAGE: http://www.retirementresearcher.com

McLean Asset Management ( email )

1900 Gallows Rd, Suite 350
# 1150
Vienna, VA 22182
United States

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