John Norstad website missing [The Fallacy of Time Diversification]

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longinvest
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John Norstad website missing [The Fallacy of Time Diversification]

Post by longinvest » Mon Apr 02, 2018 8:33 am

While checking some of my bookmarks, I discovered that John Norstad's website (http://www.norstad.org) has gone missing. :(

For those interested, I was able to find one of my favorite articles on the WaybackMachine:

Risk and Time, by John Norstad
https://web.archive.org/web/20170911171 ... -time.html
The Fallacy of Time Diversification

Portfolio theory teaches that we can decrease the uncertainty of a portfolio without sacrificing expected return by diversifying over a wide range of assets and asset classes. Some people think that this principle can also be used in the time dimension. They argue that if you invest for a long enough time, good and bad returns tend to "even out" or "cancel each other out," and hence time diversifies a portfolio in much the same way that investing in multiple assets and asset classes diversifies a portfolio.

[...]

While the basic argument that the standard deviations of the annualized returns decrease as the time horizon increases is true, it is also misleading, and it fatally misses the point, because for an investor concerned with the value of his portfolio at the end of a period of time, it is the total return that matters, not the annualized return. Because of the effects of compounding, the standard deviation of the total return actually increases with time horizon. Thus, if we use the traditional measure of uncertainty as the standard deviation of return over the time period in question, uncertainty increases with time.

[...]

Common variants of this time diversification argument can be found in many popular books and articles on investing, including those by highly respected professionals and even academics. For example, John Bogle used this argument in his otherwise totally excellent February, 1999 speech The Clash of the Cultures in Investing: Complexity vs. Simplicity (see his chart titled "Risk: The Moderation of Compounding 1802-1997," which if it had been properly drawn might well have been titled "Risk: The Exacerbation of Compounding 1802-1997"). Burton Malkiel uses a similar argument and chart in his classic book A Random Walk Down Wall Street (see chapter 14 of the sixth edition). (I deliberately chose two of my all-time favorite authors here to emphasize just how pervasive this fallacy is in the literature.)

The fact that some highly respected, justly admired and otherwise totally worthy professionals use this argument does not make it correct. The argument is in fact just plain wrong - it's a fallacy, pure and simple. When you see it you should dismiss it in the same way that you dismiss urban legends about alligators in sewers and hot stock tips you find on the Internet (you do dismiss those, don't you? :- ). It's difficult to do this because the argument is so ubiquitous that it has become an unquestioned assumption in the investment world.

For more details on this fallacy, see the textbook Investments by Bodie, Kane, and Marcus (fourth edition, chapter 8, appendix C), or sections 6.7 and 6.8 of my own paper Random Walks.
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Taylor Larimore
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Re: John Norstad website missing [The Fallacy of Time Diversification]

Post by Taylor Larimore » Mon Apr 02, 2018 8:46 am

longinvest:

It is a great disappointment for me to learn that John Norstad's wonderful "Financial Page" is missing when Googled. I am pleased to see that you were able to bring-up one of his greatest articles using the WaybackMachine.

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

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Re: John Norstad website missing [The Fallacy of Time Diversification]

Post by dbr » Mon Apr 02, 2018 8:47 am

longinvest wrote:
Mon Apr 02, 2018 8:33 am
While checking some of my bookmarks, I discovered that John Norstad's website (http://www.norstad.org) has gone missing. :(

Yes, it seems to be gone. That was one of my go-to articles when the subject came up. It is particularly interesting because the basis for the whole discussion turns on understanding or misunderstanding mathematics.

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Re: John Norstad website missing [The Fallacy of Time Diversification]

Post by Mel Lindauer » Mon Apr 02, 2018 11:22 am

John's work has been widely read and highly regarded for years. Hope he's just taking some time off to relax and that this doesn't mean he's no longer with us.
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Re: John Norstad website missing [The Fallacy of Time Diversification]

Post by Peculiar_Investor » Thu Nov 29, 2018 9:27 am

longinvest wrote:
Mon Apr 02, 2018 8:33 am
While checking some of my bookmarks, I discovered that John Norstad's website (http://www.norstad.org) has gone missing. :(
For those interested, the last snapshot of his Finance pages that the Wayback Machine captured can be found in John Norstad's Finance Page | Wayback Machine.
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Re: John Norstad website missing [The Fallacy of Time Diversification]

Post by 2015 » Thu Nov 29, 2018 2:49 pm

My favorite line:
The fact that some highly respected, justly admired and otherwise totally worthy professionals use this argument does not make it correct.
Beware arguments anywhere hiding beneath the cloak of complexity.

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Re: John Norstad website missing [The Fallacy of Time Diversification]

Post by RadAudit » Thu Nov 29, 2018 6:46 pm

2015 wrote:
Thu Nov 29, 2018 2:49 pm
My favorite line:
The fact that some highly respected, justly admired and otherwise totally worthy professionals use this argument does not make it correct.
Beware arguments anywhere hiding beneath the cloak of complexity.
Maybe, if I could do the math, the argument wouldn't be hiding beneath a cloak of complexity. :?
FI is the best revenge. LBYM. Invest the rest. Stay the course. - PS: The cavalry isn't coming, kids. You are on your own.

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Re: John Norstad website missing [The Fallacy of Time Diversification]

Post by 2015 » Sun Dec 02, 2018 1:51 am

RadAudit wrote:
Thu Nov 29, 2018 6:46 pm
2015 wrote:
Thu Nov 29, 2018 2:49 pm
My favorite line:
The fact that some highly respected, justly admired and otherwise totally worthy professionals use this argument does not make it correct.
Beware arguments anywhere hiding beneath the cloak of complexity.
Maybe, if I could do the math, the argument wouldn't be hiding beneath a cloak of complexity. :?

Munger said it best: Where there is complexity there is by nature fraud and mistakes (my emphasis).

I view anyone anywhere peddling complexity as having interests diametrically opposed to my own. Just because those interests are cloaked does not make them any less harmful to me.

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Horton
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Re: John Norstad website missing [The Fallacy of Time Diversification]

Post by Horton » Sun Dec 02, 2018 5:36 pm

Thanks for sharing. This is a great article.

I've read similar arguments in Bill Bernstein's "Rational Expectations" and Bodie's "Risk Less and Prosper". After reading Norstad's post, it sounds like he largely learned of this via Bodie.

I read Mr. Money Mustache's latest column last night, How to Retire Forever on a Fixed Chunk of Money, and noticed an example of The Fallacy of Time Diversification:
Stock market crashes are never permanent. In the long run, the market always goes up. So all that happens during a crash is that those few shares that you do sell during those brief times when the market is down, will hurt your account balance just a bit more. Within a year or two, the market is back up and your remaining stocks are more valuable than ever. If you want even further reassurance, you could just choose to spend a bit less money during this time.
🏃 since 2005

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