Diversifying Across Time
There is one more risk to consider and it relates to time. Not just time in the market, which we already discussed, but also the time it takes to get in and out of the market.
Theoretically, you might invest all your money in the stock market or real estate at the top of a bull market, or bubble, and then make a sudden loss all at once when the market crashes. I.e., you might have invested in early 2008, right at the worst possible time, and made a big loss in the Great Recession without even having enjoyed the long period of growth that led up to it.
For most of my readers, this is not an issue. Most will invest their money gradually over time – because they don’t have much yet! You have to earn and save it first. Making regular investments is actually a great strategy. Earn your money, budget, save, and invest as you go along, over many years, regardless of what the market is doing – exactly as you were going to do anyway.
During crashes, if you stick to the plan, you’ll automatically be buying more stocks while they are cheap. During a peak, you’ll be buying fewer expensive shares. You can ignore the blaring market news and keep investing, month after month. Until you are nearing retirement, it is white noise.
Reversal: if you’re lucky enough to have a large amount of money ready to invest for the long term right now, you might as well invest the total amount immediately rather than doing it bit by bit. As we have seen, the more time in the market, the better – if the market crashes just after you invest, you will have many years to make it up. The strategy of investing gradually rather than all at once, when you have the option to do the latter, is called ‘dollar cost averaging’, and research suggests there’s not much benefit to it.[i] Time in the market is more important.
If you’re moving from growth to defensive investments as you near retirement, or for some other reason, consider making this change gradually over time to lessen the risk that you’ll suddenly move all your money out of the stock market just after a crash. Selling shares over time spreads the risk out. Usually, as people near retirement, they spend a decade or two moving towards ever greater proportions of defensive assets. However, for most readers, this will be a long way off.
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