Investing in Stocks and the Combined Safety and Rewards Associated with 'Time Diversification'

The highest return lowest risk to investing over time is to buy and hold a diversified basket of stocks.


And for most of us, that means buying low cost index funds such as the S&P 500 index fund and then leaving it along for the next several decades.


It's time diversification and the set it and forget approach to achieving optimal investment returns over a working career.


And the sooner we start, the better off we'll be in the end.


Stocks are far less risky than you think is subtitled 'The advantages of sticking with equities over the long haul:'


"Most people try to reduce risk in their investment portfolio by seeking safe havens like bonds, or by moving money out of the parts of the market that scare them at any given moment.


But what if the best way to minimize risk was to simply buy and hold stocks for the long run?


In a world where many investors seemingly have given up on the idea that buy and hold can work, some new research from two college professors and the head of retirement research for Morningstar Investment Management suggests that stocks become less risky the longer you hold them, research which suggests that “set it and forget it” could be pretty good investment advice, and that you should overweight your portfolio toward stocks, even as you age and most people are becoming more conservative. . . . 


There are a lot of reasons why some investors, intuitively, believe that stocks are inherently more risky the longer you stick with them. For starters, there is the idea that the longer you stick with a portfolio, the more market gyrations, downturns and corrections you will live through. . . .
                                       
The concept behind the new research involves “time diversification,” an idea that experts and academics argue over, with some suggesting it’s real and powerful and others saying it doesn’t exist.                                        


You’ve heard of diversifying into different asset classes and across the international landscape and more, but time diversification simply suggests that the longer holding period effectively diminishes the effect of any short-run period, as has happened to folks who rode out the financial crisis of 2008 by sticking with the market through its ups and downs to get to its recent highs.


In short, investors are more risk-averse—they want to feel certain of bigger returns—during downturns and recessions, but are willing to accept more risk when the market is growing, and time diversification assumes that these swings will even out.


“One would think that in theory holding a diversified portfolio of cash, bonds and stocks creates the most amount of wealth 20 years from now,” Blanchett said. “That actually isn’t the case. If you look back over history, holding stocks over the long haul has been the optimal thing to do"….                                      


The research does not change the fact that there are still going to be good and bad times to buy stocks, it simply points out that investors benefit from being more aggressive—in the broad mix of stocks/bonds/cash, it suggests going more in the direction of equities than you might otherwise have been leaning—and from hanging on.
                                       
While Blanchett noted that economists might call doing a little of each strategy irrational if you believe the research that shows long-term providing that free lunch, he noted that doing a bit of each—having some very long-term money for part of a portfolio and another portion for short-term, trading-oriented activities—probably would make many people comfortable.


That said, the new research gives investors who had been hearing, feeling and otherwise thinking that buy-and-hold investing is dead a big reason to feel like maybe their investment philosophy has more merit than it has been given credit for.


It also gives them a reason to tilt their portfolios toward equities, despite the nervousness most investors have been feeling toward stocks since the turn of the century.


“The longer your holding period, the more aggressive you really can and should be. For an investor with an infinite time horizon—let’s just say 20 or 30 years—probably the lowest risk long-term investment for that investor is actually stocks,” Blanchett said. “Throughout history, holding a portfolio of all stocks has actually been less risky of all cash, if you look at the final income value after 30 years.


“The kicker is that people tend to look at their account statements on some regular intervals and they feel that pain long-term,” he added. “But really if you were going to buy something, put it in a lockbox and then come back and check it 20 years from now, hands down that would be stocks.”"


Summing Up


Contrary to popular belief, a stocks only investment strategy of buy-and-hold over a long period of time provides individual investors with both the safest and highest rate of return.


I realize that runs counter to what the gurus tell us, but I also know that it works.


And investing in a low cost index funds is the best choice for most individuals to make, since it requires no expertise, limited costs and requires no time to keep up with the daily ups and downs of the stock market.


Besides, it may feel better to not always know what's going on as the market swings between highs and lows over time.


In the long run, the swing is always to the high side.


That's not only my take: it's historical fact.


Thanks. Bob.