Risk and Investment Horizon: Is Time Really Money?

Abstract

In this study, we explore the extent to which a risky investment, like one in stocks, can become safer given a longer holding period. The key question is whether the final wealth is more at risk or less at risk as the holding period increases. We take a two-pronged approach: First, we use Monte Carlo simulation and perform a controlled analysis of the effect of the holding period on risk. Second, we examine the extent to which the actual historic returns are consistent with the simulation results. The sample period covers a total of 91 years, from 1926 to 2016. Our findings lend support to the common practice of investing more aggressively as the investment horizon lengthens.