The Case For Market Timing Diversification
Definition: "Diversification" - a portfolio strategy
designed to reduce exposure to risk by combining a variety of investments
which are unlikely to all move in the same direction.
Many Market Timers Pay Little
As we have written before, "market timing is the following of a long term strategy
to profit from the financial markets, that also protects us from the inevitable
down trends that occur."
Many investors who understand the potential of market timing, pay little attention
to the potential of diversification. Many jump right into an aggressive timing
strategy with little thought about how they will handle a loss.
But there is a way to jump right in, and also realize the long term potential
of even the most aggressive strategies. It does require a bit more work, but
not all that much. Just a few minutes a day to check for changes and make adjustments.
Aggressive Market Timers Can Benefit
Many market timers already follow well defined investment plans that include
diversification. But as we just discussed above, some do not.
If you are one of those who do not, consider changing. Diversification is not
only for those who are afraid of volatility. It has an important place in even
the most aggressive of portfolios.
We have been market timing since the early 1980s and although we are aggressive,
we diversify our timing funds, not just for safety, but also to "enhance" our
| "During a bull
market, you will be fully invested most of the time, except
in those few industry sectors that are not doing well."
Those who follow our Aggressive Bull & Bear Pro Timer strategy will
make a great deal of profit over long time frames.
Because the markets tend to trend most of the time and the aggressive strategies
will catch the major part of all long-term trends in "both" directions.
But non-trending markets can be quite frustrating and aggressive market timers,
in our experience, become frustrated more quickly than most.
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Aggressive timers.... try this strategy: Use the Aggressive
Bull & Bear Pro Timer strategy for 20% of your timing portfolio.
Use the Sector Fund Strategy for 50%. Divide the rest between Bond
Timing, Small Cap Timing and Dollar Timing strategies.
Although the sector funds go to cash on sell signals, these industry specific
funds are big winners when they trend. Often they will trend much further,
by 100% to 200%, than the rest of the market.
Stick with the sector funds that follow major industries,
such as Health, Technology, Internet, Energy, Financial Services. Most
of the sectors we follow are major sectors. Pick five that are affected
differently by the economy. Example; do not choose Health and Biotech
which have similarities.
When the bear growls, you will have 20-50% of your portfolio profiting on the
short side, or in cash, plus those sector funds that are profitable even during
a bear market (there are always some).
You will make money, but have only a small percentage of your timing portfolio
During a bull market, you will be fully invested most of the time, except in
those few industry sectors that are not doing well.
Diversified portfolios have a dramatic effect in controlling volatility and
drawdowns. Yet can be extremely profitable over time. The best of all worlds.
Fibtimer already has a Diversified Portfolio Strategy
that can also be used. It divides your timing into five distinct investment
areas. Interested subscribers should check it out. It does not include
the sector funds but it is a well diversified strategy.
Even Conservative Market Timers Can Benefit
Those conservative market timers who are willing to devote at least a little
extra time, can enhance their profits by adding the Sector Timer strategy as
a percentage of their timing portfolio.
Being conservative does not mean you cannot be active. Using the Conservative
S&P Timer strategy will always do well over the years because it is designed
for long trending markets, and makes changes infrequently.
| "Each market
timer will have his or her own style. Even a very basic
plan can be made more stable with diversification."
But if you used it as a base for your timing portfolio,
say for 50% to 60% of it, you can easily be more active with the other
40% to 50%, and still be well within the guidelines of "conservative" investing.
Again we suggest using the Sector timer. In this case "because" it goes to
cash during sell signals, and because it follows a diversified strategy of
its own (multiple positions are always used), it can add considerably to your
profit potential (sectors tend to trend longer and higher during bull markets).
For those who prefer using ETFs, use the major industry
sectors in our EFT strategy.
Each His Own Style
Diversification can obviously be quite varied. Each market timer will have
his or her own style. Even a very basic plan can be made more stable with diversification.
For example, if your core timing account follows the Conservative S&P Timer
strategy with 70% of its funds, allocating 15% for the aggressive Pro Timer
strategy and 15% for the Bond Timer strategy will cover most bases, and yet
still offer an additional level of safety.
Consider at least some diversification for your market timing funds.
We mention the Sector Timer in several the diversification scenarios above.
This is because it is "already" well diversified (at least five different industry
sectors should be used by subscribers who use this strategy), yet has the tremendous
profit potential inherent in industry specific funds (sector funds usually
trend farther, percentage wise, than the general market). The ETF Strategy
can also be used of course.
Diversification can dramatically help control volatility and drawdowns.
Diversification, when properly applied to your portfolio, will actually enhance
your profit potential over time.
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Disclaimer: The financial markets are risky. Investing is
risky. Past performance does not guarantee future performance.
The foregoing has been prepared solely for informational
purposes and is not a solicitation, or an offer to buy or
sell any security. Opinions are based on historical research
and data believed reliable, but there is no guarantee that
future results will be profitable.