Marty Fridson: The case for diversifying over time.

A prudent investor wouldn't build a portfolio based on a single stock. What about a "single-time frame"?

Diversification has become a part of every investor's toolkit to manage risk. Owning a portfolio rather than a single stock reduces your risk of suffering a catastrophic loss.

Diversifying investments can be done by dividing holdings between asset classes such as stocks, commodities and bonds, or by dividing them among different regions including the U.S.A., Europe, and emerging markets.

There is still another area of investment that some investors do not diversify: time.

Investors may not think about it this way, but they do when they make a large bet on the short-term performance of the stock market.

All in, all out

Take the following example: An investor believes that the current market view of the economy's health is too pessimistic. They expect that upcoming reports about unemployment, GDP and Industrial Production will beat consensus expectations.

Investors who want to capitalize on their superior insight switch from a cash-only position they maintained during a recent downturn to a weighting of 100% in large-cap stock.

The investor's risk could not be more tightly controlled from the perspective of selecting the issue. By using an S&P 500 Index Fund, they can eliminate the risk of ending up with the worst performing issue within that universe.

The in-and out investor is also exposed to another source of risk, namely the large variation in the short-term returns on the market. Over the last 10 calendar years the S&P 500 posted eight quarterly negative total returns. Over that period, the index's worst quarter return was negative 19,60% during the first three-month period of 2020.

Investors who place a huge bet at one point in time are massively overestimating that particular period.

You might say that the COVID-19 epidemic was responsible for the wipeout of a fifth of S&P 500 investors' exposure in the first three months of 2020. This is not an event likely to happen again anytime soon.

The second-worst return of the decade was a negative 13.98% for the fourth quarter of 2018, when there was no global pandemic in sight.

This is not an example to be taken seriously. Few investors switch from cash to full investment?overnight. Similarly, few gamble all their money in one stock. The rise in passive investing indicates that more investors are restricting their active decisions.

According to a survey by eToro in 2025, 60% of investors said they buy on dips, indicating they were reserving firepower. And according to a Gallup survey from 2021, more than 10% believed that market timing was more important than the time spent in the market.

Market timing is still a popular lure, just as stock picking was. Many people believe that they can enter and exit the market at the perfect time.

The Case for Staying Put

My point isn't just that timing the market often fails. This is well-documented. Investors should also consider the time element as a potential source of both risk and reward.

Look at the S&P's average quarterly total return over the next 10 years. It was 3.86% - a return of 16.36% annuallyized.

The average annualized returns for the S&P 500 from 1996 to 2025 were 2.84%, which is equivalent to 11.85% if you zoom out 30 years. The S&P 500 quarterly total return from 1996 to 2025 was an average of 2.84%. This annualizes?to 11.85%.

Staying invested alone delivered a solid base-level return. Any additional returns that could have been achieved through shrewd stock selections or sector allocation decisions were therefore gravy.

By reducing volatility by betting on a specific time period, an investor can take more risk by investing in other sectors or companies.

Investors can also put more money to work by overweighting a particular period, but the goal is to not have too many eggs in one basket.

The "settling" of a 4% quarterly average over a period of 10 years is less profitable than investing in stocks for the big bonanzas, such as the 20,5% return in 2020's second quarter and the six other double-digit return quarters from 2016 to 2025.

No prudent investor, however, can profit by consistently entering the market and exiting it at the right moment. It would be impossible to predict the market with certainty, and I don't know of any formula that can do this.

(source: Reuters)