Investment diversification and investment specialization and the assumed holding period

Optimum mean-variance (M-V) investment diversification strategies are analysed as a function of alternative investment horizons. For almost all possible one-period correlations across assets, it is found that as the investment horizon increases, the correlations approach zero and the M-V investor tends to specialize in one asset-the one with the lowest value Ai when, Ai ***, which implies in most cases specialization in the lowest mean asset. The lowest mean asset dominates because the multiperiod variance increases faster for assets with high mean returns and because of the possibility of borrowing and lending at the risk-free interest rate. This strategy is contrary to professional investment advice, which generally asserts that, for longer investment horizons, the investor can achieve diversification across time by investing primarily in equities which are characterized by relatively higher mean returns. Similar results hold when the M-V rule is relaxed and the investor maximizes expected utility (myopic) when portfolio revisions are allowed.