
Markku Kurtti – Diversification is a Negatively Priced Lunch (S7E7)
Flirting with Models
Diversification and Time Horizon Relationship
The conventional wisdom suggests that less diversification is needed with a longer time horizon, but the model based on terminal wealth indicates the opposite. It demonstrates that diversification should increase proportionally with the length of the time horizon to maintain a constant terminal wealth ratio and prevent a decrease in wealth or an increase in the probability of losing to the benchmark. For instance, if originally holding 10 stocks for a 5-year period, one would require 50 stocks for a 25-year period, due to the squared leveraged multiplier.
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