Diversifying Your Investments Over Time

I've recently written a post on why long term investing isn't always a smart move. As examples I've looked at an investor who chose to invest in either the Nasdaq at 2000 or the Nikkei in the 90's. Both poor choices which have lead to years of loss and a negative return on investment.

Diversification is nearly a must for household investors. Hand picking winning stocks in the style of Warren Buffet or George Soros is very hard. Household investors are often recommended to diversify their investments to include:

1. Industries and economic sectors - For example growth stocks, energy, financial etc.
2. Geographies - USA, emerging markets, Europe etc.
3. Financial Assets - Stocks, bonds etc.

By diversifying we're actually reducing the specific risks in our investments (A company defaulting, a war etc.) and we are left with the market risk. However, time represents another specific risk that should be diversified.

Usually we find ourselves with a significant sum of money available for investment after accumulating it for a time in a deposit or savings account. After reading about the fantastic returns available in the stock market we eagerly rush to invest. We diversify by the books and wait for those legendary returns. Alas, the market suddenly decided to go bearish on us and we're left with 70% of our savings at best for the next couple of years or until the next economic cycle.

No one can time the markets. Not even investment gurus. We shouldn't try either. Instead we should diversify our investment over time. In the long run our buying prices will average out the trends and will enable us to benefit from real long term growth instead of successful speculations.

If you have some money available increase your investment in stocks or stock based assets gradually and slowly in accordance with your investment term.

Related Posts:
1. Long Term Investing Isn’t Always a Smart Move
2. Diversifying your risk in the stock market