Time Diversification When There Are Periodic Withdrawals

Abstract

The author examines the long-run return and risk to various asset classes when held in an account from which one makes periodic withdrawals, such as an endowment or retirement fund. As in previous studies, this article finds that small-cap stocks have the greatest wealth relative on average followed by large-cap stocks. There is little difference between the average wealth relatives for corporate bonds, and Treasury bills have the lowest wealth relative on average. Conclusions regarding risks vary greatly depending on which risk measure is used. As the investment horizon lengthens, the probability of stocks earning less than Treasury bonds or bills decreases. However, these probabilities are much higher than those in previous studies. For the most part, the other risk measures suggest that the risk of stocks relative to bonds or Treasury bills increases as the investment horizon lengthens.