Time Diversification Of An Investment Portfolio

A very important diversification and portfolio structuring technique is to arrange your portfolio into different expected maturity classes. The broad underlying rule is that those investments with a longer expected maturity date are less risky. This will help the investor to balance his portfolio and risks between higher risk short trades, with fast profits (and equally fast losses), and longer term trades, that allow more freedom to wait for the appropriate moment to trade for maximum profit.

Stanlib recently determined that in any calendar year there is a 27% chance to lose money on the stock exchange. The picture is significantly different over a four year period, where the chance for a loss is almost next to nothing. Therefore by allowing yourself more time to identify the best time to buy or sell a share, you can reduce your risks significantly. Although you might have a slow growth rate for the first three to five years, you are positioned to achieve excellent returns outperforming inflation.

I divide my portfolio into the following expected maturity periods: 1 or less years, 3 years, 5 years, and 10 or more years. On the JSE Exxaro is a share that trades well between the R110 to R125 range as a short term trade. It’s also a very good buy for the longer term.

So next time you invest in equities ask yourself into which risk/time category the share falls, and whether you can commit to a five year period to reduce your chance of a loss.