Does the Planning Horizon Affect the Portfolio Structure?

Does the composition of the optimal portfolio depend on the planning horizon? According to popular opinion there exists a planning horizon effect if initial wealth has to be allocated between shares and the risk-free asset: the percentage invested into shares should increase if the planning horizon is extended. The paper reviews the theoretical underpinnings of the statement. In the framework of expected utility the findings are mixed. Some results can be derived which contradict the popular opinion. But one can also find results which support the popular opinion. The conclusions depend on the class of utility functions under consideration and on the alternatives to be compared. However, from the analysis of shortfall models strong evidence in favor of the popular opinion can be inferred. In addition, the optimal percentage invested in the stock market can easily be quantified. The well-known shortfall criteria of Roy, Kataoka, and Telser are studied in some detail.