(The) Boring Investor
Time diversification is the keeping of an investment over an extended time period and thereby attaining a diversification of annualised return over time. It is often said that time diversification helps to improve your investment returns. At one time, I used to be an ardent fan of time diversification.
However, after considering further about it, I realised that time diversification, while not irrelevant totally, is quite irrelevant. Let’s have a closer look on the situation of your time diversification. Using the historical profits of the Straits Times Index from end-1984 till end-2012 as the bottom data, we can build the annualised return over different keeping periods. 78% to -49%. Anybody keeping shares through the worst 1-year period could have experienced a great loss.
Over a 2-year period, the worst annualised return boosts to -23%. This worst annualised return proceeds to improve as the keeping period increases, eventually achieving a positive amount when the keeping period reaches 20 years. This evidence is often used to prove that over long periods of time, share investments can yield positive returns, regardless of when you start your first investment. The first part of the statement “over extended periods of time, share investments can produce positive earnings” holds true and is where time diversification is pertinent.
But the next area of the statement “irrespective of when you begin your first investment”, is one of the nice explanations why time diversification is irrelevant. I can think of 3 reasons why time diversification is not relevant. Firstly, consider the worst annualised return of the 1-yr and 2-calendar year holding periods.
On the top, the most severe annualised come back of -23% over a 2-year holding period appears much better than the most severe annualised return of -49% over a 1-year keeping period. By the end of the 1-yr keeping period, the eventual come back is -49%. But at the ultimate end of the 2-calendar year holding period, the eventual return is -41%. The annualised come back of -23% over the 2-year holding period means an eventual come back of -41% at the end of the 2-season period.
- Answering clients’ questions
- Lesser income for companies that has overseas businesses
- 2017 Funding: $150,000,000
- Markets tend to return to the mean over time
- My collateral ETFs were up very slightly (India, Hong Kong and China) based on the local markets
This is very little not the same as the eventual come back of -49% for a 1-calendar year holding period. It really is cold comfort to the trader by informing him that the most severe annualised come back is halved when his keeping period is doubled (in the example above). The only comfort he has, if any, is the rate at which the money is lost, over a 2-year period of a 1-year period instead.
In substance, time diversification is averaging the eventual return. Secondly, consider the best case where in fact the worst annualised return is a positive 3.7% in a 20-yr holding period. This is 4 just.7% from the best annualised return in the same holding period. 206,354. This is a very respectable return, considering that this is dependant on a worst type of annualised come back for the holding period.
However, what’s the eventual return predicated on the best annualised come back of 8.4%, which is 4 just.7% better? 206,354, when he could get 2 possibly.5 times more had he made his investment at the best entry time. The third and last reason time diversification is irrelevant is: we only have 1 life; there is 1 keeping period suitable to everyone folks whether or not or when you make investments. So, to summarize, time diversification is pertinent in the sense that over long periods of time, share investments can yield positive returns. It is irrelevant in the sense that it is the eventual return, not the average annualised return, that matters.