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 Attention

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 period of losing signals.

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 quite 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 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 all 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.

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.

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.

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 Long term 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).

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 Long Term Timer strategy with 70% of its funds, allocating 15% for the aggressive Pro Timer strategy, 10% for the Bond Timer strategy and 5% for the Gold Timer strategy will cover most bases, and yet still offer an additional level of safety.

Conclusion

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 eight sectors should be used), yet has the tremendous profit potential inherent in industry specific funds (sector funds usually trend farther, percentage wise, than the general market).

Diversification can dramatically help control volatility and drawdowns.

Diversification, when properly applied to your portfolio, will actually enhance your profit potential over time.