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This article asks whether it is possible to diversify investments through time—a hotly debated topic, and one that divides academics and practitioners perhaps like no other financial paradigm. In the late 1960s, Samuelson first argued strongly against the existence of time diversification. Since then, other academics have raised a theoretical challenge to the notion of time diversification. On the other hand, empirical evidence has hardly supported their view. To date, the question still remains wide open: Does time diversification exist? If so, what are the policy implications for asset allocation? This article addresses the gap between theory and empirical evidence by reexamining these issues using a time series framework. Three time series models are fitted with historical data on S&P 500 Index and T-bill and T-bond returns over the period 1802–2002. Although both T-bill and T-bond returns are found to evolve in different serial correlated stationary processes, stock returns are consistent with a mean-reversion process. The change in relative riskiness of stock over bill and bond returns as a result of different time diversification effects strongly supports the conventional recommendation on asset allocation policy with different investment horizons.

Selecting an investment manager is a matter of choosing the manager who can produce the best numbers in the future. But, the same set of numbers drawn from the past can often present two very different pictures. Changing the benchmark, changing the fiscal year, risk-adjusting the performance, can all make a bad product look good or a good product look bad. The quest for a single, simple measure of performance often leads to an overly simplistic view of the past, which can lead to poor choices for the future.

The choice between active and passive management is an important one, but often made on a foundation of false assumptions and flawed logic. A strong case can be made, at any time, for either. The basis for a sound choice is surprisingly simple. Ultimately, it hinges on views that 1) markets are efficient or inefficient, 2) some managers are able to identify inefficiencies in advance, or they are not, and 3) investors can identify the successful managers in advance, or they cannot. Recent past results are a very dangerous basis for this important choice. An array of questions and issues should be addressed in the choice between active and passive management, providing a roadmap for a sensible decision.

The authors examine the effect of European Monetary Union on the opportunities for active managers to add value. EMU clearly reduces the opportunities for currency and fixed-income managers, but the loss of opportunity is minimized because of the high correlations of currency returns and fixed-income returns. The direction of EMU’s impact on equity managers is less clear. A reduction of barriers to trade should result in a more singular economy, thus reducing differences between country equity returns; however, free trade may also result in greater industry concentrations within specific countries.