Time Horizon, Risk, and Implications for Equity Selection

Abstract

The author examines over 50 years of equity returns and finds distinct risk characteristics across different time horizons. Defensive, lower beta equities have had smaller monthly losses than their beta would suggest, making them attractive for conservative investors with shorter holding periods. In contrast, the volatility of cyclical, higher beta companies has been increasingly favorable over longer holding periods, bolstering risk-adjusted returns for long-horizon growth investors. This suggests that investors who align the mix of defensive and cyclical stocks to their goals and investment horizon can mitigate risks more effectively than those who simply hold the broad market and add bonds.

TOPICS: Portfolio construction, equity portfolio management, analysis of individual factors/risk premia

Key Findings

• • Defensive, lower beta equities have had smaller monthly losses than their beta would suggest, making them attractive for conservative investors with shorter holding periods.

• • The volatility of cyclical, higher beta companies has been increasingly favorable over longer holding periods, bolstering risk-adjusted returns for long-horizon growth investors.

• • Investors who align the mix of defensive and cyclical stocks to their goals and investment horizon can mitigate risks more effectively than those who simply hold the broad market and add bonds.