NOT TIMING

You might conclude that investment success follows those who diversify by asset class, while failure will befall those who diversify by time. Actually, neither premise is correct. The real message is that you must now follow both criteria if you are to achieve investment success: You must create a highly diversified portfolio, and you must maintain that portfolio for long periods. This is why market timing — the concept of moving in and out of investments as they rise and fall — fails. Market timing is the exact opposite of diversification. Where diversification tells you to invest in a variety of asset classes, market timers put all their money into stocks. Where diversification tells you to hold on to those assets for long periods, market timing tells you to frequently buy and sell your stocks in an effort to capitalise on the momentary fluctuations of the stock market.

Market timing is enticing. One book published in 1996  promises that you can double your money every two to four months. Imagine! Double your money every 60 to 120 days! This is the allure of market timers: They offer the promise of such fabulous, quick, and easy wealth that you figure it’s worth risking twenty bucks to buy the book and see. Or the US $22 to attend the introductory seminar. Or the US$295 for the annual newsletter. Or the US$2,500 for the complete workshop. It might be hard for you to believe, but I have never met anyone who has achieved wealth through market timing. But I know of lots of people who have gotten rich selling books, tapes, and seminars about it. Think about it: Let’s say you were able to double your money every four months. If you started with $10,000, guess how much money you’d have in 10 years? You’d have $5.3 trillion — enough to pay off the national debt of the US! In just 10 years! Assuming you could do this, why on earth would you be wasting your time telling everyone about it? So you could earn the three-dollar royalty from selling a book? As an investment advisor, I often have much more difficulty convincing someone to invest in a portfolio that will produce — if we’re lucky — annual returns that average 10%, or 12% over long periods, while there are others who claim to be able to double your money in an instant have no problem getting people to throw money at them.

STOP TAKING THIS DIVERSIFICATION STUFF TOO LITERALLY
You need to focus more and more of your attention on asset allocation, and less and less on individual stock-picking. It’s the forest vs the trees concept. The entire notion of diversification and asset allocation refers not to annual returns, but to volatility. In other words, I am not claiming that, by carefully allocating your money over a wide variety of asset classes, you are going to end up with more money than if you had merely plunked it all down on Lara. I merely am suggesting that, by properly diversifying your investments, you will earn almost as much as if you had plunked everything on Lara, while protecting yourself from the extreme possibility that Lara might prove disastrous. But what I am not denying - and this is important - is that, in the end, Lara just might have been the more profitable thing to have done.

You should note that picking a great allocation model  does not compensates for picking lousy investments. Nothing could be further from the truth. In fact, you must carefully allocate your assets, and then you must select the proper investments for each allocation. Missing on either point could prove as expensive as, well, as picking Lara. So, to make it all perfectly clear, you  need to devote substantial attention to both asset allocation and investment selection, not merely one or the other. And you thought life was going to get simpler. Instead, it says interest rates are irrelevant, that you ought to be looking at stocks, not bonds, anyway. Now you’ve been exposed to three attitudes, each of them intelligently offering their opinion. Then you start to understand: They are, indeed, merely opinions, not facts. So you reread the first two articles, this time focusing not on what they are saying about where interest rates are headed, but on why they are saying it. You discover something you weren’t expecting: Both publications agree on what causes interest rates to move, and on the financial implications if rates indeed move. They differ on only one point. Whether the rates are going up or down. Then you realize that they haven’t got a clue, any more than you do.

That’s when it hits you: It’s not that they aren’t any better at this than you are. It’s that you are just as good at it as they are! So, for the very first time in your life, feelings of intimidation about personal finance start to fade away. You’re beginning to feel ready to make the call: Do I really want to be in a money market fund right now? You don’t turn to the magazines for the answer. You rely on your own judgment. But you know you don’t have enough facts. Or enough knowledge. So you continue reading. While you keep subscribing to the magazines that got you started, you need more as you begin to feel they’re a little too basic, so you turn to the business press. You are surprised at how easy they are to read, and how good they make you feel. Then you start to listen to radio talk shows about money, and you start buying books like this one. You even start sharing what you’ve learned, buying copies for your family and friends to help them discover what you’ve learned. What you’ve learned is that the field of personal finance is an art, not a science, and there is no “one” answer to any situation.