Diversification has been considered a key to success in investing world. “Don’t put all your eggs in one basket” is the brilliant advice which has been used as a thumb rule by many successful investors. Rightly so, one can reduce the risk by expanding the portfolio and by adding more financial instruments rather than sticking to one type. The most successful investors recommend diversifying the stock portfolio and the main reason behind this advice is the volatility of the stocks, which increases the risk for many investors. By diversifying, one can protect the investments against volatilities. However, most of us have never heard of time diversification, which is equally important when it comes to success in investing. Here is how an investor can use time diversification.
Stay Longer in the Game
Time diversification refers to keeping your portfolio for a little longer and thinking a broader time horizon than the short term vision. Many investors are not able to make gains because of their short-sightedness and their tendency to act quickly. Any news related to a particular stock going southwards prompts these impatient investors to sell their stocks and look for a better one. When it comes to investing in mutual funds, most of the people tend to be enamored by the latest performance of a mutual fund. Rather than looking at the consistency, most of the newbie investors rely on the recent news and information and the result is entering or exiting a fund at the wrong time. Now, this is not the way you can win the game. In his book, Behavioral Finance and Wealth Management: How to Build Optimal Portfolios, Michael M. Pompian suggests “holding on the volatile investments such as stocks and long term bonds for a longer period of time can soften the effects of such fluctuations” and “if an investor cannot remain in a volatile investment for a longer period of time, he or she should avoid that investment.”
Do not switch between Different Stocks
Many investors keep switching between mutual funds in order to earn higher returns and this reduces the overall return because the fees for switching are too high. The main advantage of time diversification is that your investments are spread across various time cycles that are needed to earn an optimum return on your investments. Rather than acting quickly on the basis of latest news, it is important to wait and see the investment cycle and get maximum returns. In other words, you need to stick to a set of stocks for longer period in order to increase the odds of winning.
“No matter how great the talent or efforts, some things just take time. You can’t produce a baby in one month by getting nine women pregnant”—Warren Buffett