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Alexander Ineichen Research report by Alexander Ineichen of Ineichen Research & Management and Virtus Investment Partners. You can read the full report here.

Alternative investments are still not fully destigmatized by many investors, despite the fact that their inclusion in balanced portfolios has proven their merit at least twice during the previous decade. The purpose of this Series of reports is to demystify some of the misconceptions still surrounding alternative investments.

Some academic finance literature suggests that time diversifies risk, meaning that investing for the long term reduces risk. Disciples of buy-and-hold strategies also believe in the idea of time diversification. The logic is that if one has a very long investment horizon, one can recover from large losses. The counter argument is that time actually amplifies risk. The logic here is that over the longer term, more bad things can happen and the probability of failure and destruction is higher. As this decade has progressed and the current credit crisis has continued to unfold, it is becoming apparent that the science we refer to as finance, and which is built on Modern Portfolio Theory, has its shortcomings. Volatility is not a good proxy for risk. Accidents happen. Things can go wrong and volatility has very little to do with it.

We think time diversification is a myth. Time amplifies risk. It ......................

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