The Argument About Time Diversification
Should time horizon affect asset allocation?
It seems so straightforward: Because stocks are more volatile than bonds, and bonds more volatile than cash, an investor's asset mix will vary according to time horizon. Preparing for next year's house down payment? Mostly cash, perhaps a few short bonds, probably no stocks. Saving for a 2055 retirement? Mostly stocks, some longer bonds, little cash.
The economist Paul Samuelson begged to disagree. In 1963, he published a very short but widely cited paper entitled Risk and Uncertainty: A Fallacy of Large Numbers. In the article, Samuelson attacked the notion that a single undesirable gamble can become a desirable gamble if it is made in numbers.