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 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 profit potential.
"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 profit over one to two year 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 at risk.
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.
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.