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You should choose your asset allocation to fit your risk-reward preferences. Once you've done that it's suboptimal to further reduce risk at the expense of rewa
by OscarCunningham 6y ago
You should choose your asset allocation to fit your risk-reward preferences. Once you've done that it's suboptimal to further reduce risk at the expense of reward by holding more cash for longer.
- lmm 6y agoSo what has the better expected return between a) invest lump sum all at once into a low-volatility portfolio b) invest the lump sum progressively into a slightly higher-volatility portfolio, such that the expected regret remains the same?
- OscarCunningham 6y agoIt's (a). The optimal strategy can't possibly be (b), because it would have the bizarre implication that two investors who have exactly the same preferences and who currently have the same amount of wealth would want to allocate their investments differently depending on how far in the past they started investing. Edit: I'm quite sleepy right now, but I think the way the mathematics works out is that the risk arising from an asset is a convex function of the amount allocated to it. So by Jensen's inequality it's less risky to invest 50/50 in cash and stocks for two years than to invest for one year in cash and one year in stocks, for the same reward.