New York, NY – A recent study has shed light on the relationship between investment time horizon and portfolio allocations, challenging the conventional wisdom that returns are independent over time. The research, conducted by the CFA Institute Research Foundation, delved into the historical evidence surrounding stocks, bonds, and alternative investments, highlighting the need for investment professionals to rethink traditional portfolio optimization methods.

One widely held belief in the investment world is that the risk of certain asset classes diminishes over longer investment periods, a theory known as “time diversification.” However, the study reveals that compounded wealth, not compounded returns, tells a different story. By examining the distribution of wealth changes over various investment horizons, the researchers found evidence of increasing risk for virtually all investments over time, challenging the notion of decreasing risk for equities in particular.

The study also delves into the concept of autocorrelation, which refers to how past returns are related to future returns. By analyzing historical annual returns from 1872 to 2023, the researchers discovered patterns of positive and negative autocorrelation among different asset classes. This finding suggests that the risk of owning assets can vary significantly depending on the investment horizon, with implications for optimal portfolio allocations over longer periods.

Furthermore, the study explores the impact of inflation on asset correlations, revealing how changes in the prices of goods or services may not align with financial market movements. The researchers found notable variations in correlations between asset classes and inflation over different investment horizons, pointing to potential shifts in asset efficiency when considering inflation.

Overall, the findings indicate that asset classes exhibit varying levels of serial dependence, highlighting the complexity of portfolio optimization over different investment periods. The study’s implications have far-reaching effects on investment strategies and challenge traditional assumptions about risk and returns in the financial markets.