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Diversification - It's Not Just A Word

When the financial markets are extremely volatile traders can feel their stress levels rising. But there is no reason to be stressed if you are well diversified. If a position turns into a losing one, and that position is only 10% or 20% of a well diversified timing portfolio, you will not feel the same as you would if it was your entire portfolio. Diversified portfolios are just as profitable, but you sleep better.

The current markets are quite volatile. Huge rallies but then scary and steep declines.

Volatility is great if it is within a trend, but volatility that only moves the markets up and down quickly can be quite unsettling.

Such markets are great for day traders, or should we say those who happen to be nimble enough to take quick profits. But can be very worrisome for those with longer time-frames. This includes most mutual fund traders, who must make trades with a one day delay.

While no one wants to lose, we must keep things in perspective. Remember the saying, "keep your losses small, and let your profits run." There are times when you generate small losses, and that is just a fact of active market timing and in fact all trading.

But we should not lose sight of the second part of the saying... "let your profits run." This is what all market timers and trend followers look for. There is always another trend, and when it begins, that is when the profits are made.

There are powerful trends in progress right now. Look at the U.S. Bond Fund Timer. This is an example of what happens when a trend is in progress.

We would never recommend this single strategy to be used for one's entire investing account. It is just too volatile as stand-alone strategy. But as a portion in a diversified portfolio it can be substantial profit generator.

Diversification Has A Place in All Portfolios

This commentary will look at the Diversified Timing Portfolio as an answer to market volatility. For those who find current aggressive trading unsettling, we strongly suggest you consider it.

"If the current volatility is keeping you up at night, look to diversification."

The Diversified portfolio consists of five sectors, most with different time frames.

The first 20% follows the aggressive Bull and Bear strategy with half in the SPX and half in the NDX, The next 20% follows a conservatively timed International fund, Then 20% aggressively follows the U.S. Bond market, 20% conservatively follows the S&P 500 and 20% aggressively trades the Small Caps.

Check out the Diversified Timing Portfolio. It is considerably less aggressive than trading any one of the other strategies as stand alones.

Remember that while very aggressive timing strategies do incredibly well over time, they can be frustrating over short time frames. This is normal! Corrections are always violent and even aggressive timers do not exit at the first sign of selling. That is a sure way to generate whipsaw losses.

If the current volatility is keeping you up at night, look to diversification.

During volatile times it is comforting to be diversified. We have spoken about and recommended diversification within timing strategies many times in this column. Believe me, it has its place in your timing portfolio.


In volatile market conditions, such as we are experiencing now, using a well diversified timing strategy can create profits when other traders are lucky just to be holding onto their capital.

Draw downs, if they occur at all, are always limited. A two or three percent draw down, in a position that is only one-fifth of your portfolio, will not cause anyone to lose sleep.

Following our Diversified Timing Strategy requires only a couple of minutes a day to check for and make changes if they are needed. Fibtimer sends an emailed update each evening with any changes.

Be sure to read the "Trading Rules and Details" at the bottom of the FibTimer Diversified Timing Strategy report page before using the strategy.