No prudent investor would build a portfolio around a single stock. But what about a single time frame?
Diversification is a standard part of the investor toolkit for managing risk. Everyone knows owning a portfolio of stocks rather than a single company reduces the risk of a devastating loss.
Investors can diversify further by spreading investments across asset classes, such as stocks, bonds and commodities, or by splitting holdings among regions, including the US, Europe and emerging markets.
Yet there is another important area where some investors remain undiversified: time.
Investors probably do not think of it that way, but eschewing time diversification is exactly what they are doing when they place a big bet on the stock market's short-term performance.
Consider the following trade: An investor thinks the market's current view of the economy is overly pessimistic. They expect upcoming reports on unemployment, GDP and industrial production to beat consensus forecasts.
To capitalize on what the investor believes to be their superior insight, they switch from an all-cash position maintained through a recent rough patch, to a 100% weighting in large-cap stocks.
From the standpoint of issue selection, the investor's bet could hardly be better controlled for risk. Using an S&P 500 index fund, they eliminate the possibility of winding up with the return of the worst-performing issue in that universe.
At the same time, the in-and-out investor remains fully exposed to a different source of risk: the wide variation in short-term market returns. Over the past 10 calendar years, the S&P 500 has posted eight negative quarterly total returns. The index's worst quarterly return over that span was negative 19.60% in the first three months of 2020.
By making such a large bet on one entry point, the investor is massively overweighting one particular time period.
Oh, you might say, that wipeout of one-fifth of investors’ S&P 500 exposure in the first quarter of 2020 resulted from the Covid-19 pandemic, hardly the sort of event that is likely to recur anytime soon.
However, the decade’s second-worst return was negative 13.98% in 2018’s fourth quarter, when no worldwide pandemic was in sight.
The above is an extreme example, of course. Few investors shift from all cash to fully invested overnight, just as few bet all their money on one stock. Moreover, the rise of passive investing suggests more investors are limiting their active decisions.
However, over 60% of investors say they "buy on dips,” according to a 2025 eToro survey, suggesting they are reserving their firepower, and more than 10% still believe market timing is more important than time in the market, according to a 2021 Gallup survey.
As with the lure of stock-picking, the lure of market timing remains, as many still believe they can get in and out at just the right times.
But my point is not simply that market timing often doesn’t work. That’s well documented. It’s that investors should consider time as another element in their portfolio offering the potential for both risk and return.
Let's look at the S&P 500's average quarterly total return in the 10 years through 2025. It was 3.86%, equivalent to a 16.36% annualized return.
This was a favorable period for equities, of course, but if one zooms out to 30 years, the average annualized returns are also quite healthy. The S&P 500’s quarterly total return for 1996 to 2025 averaged 2.84%, which annualizes to 11.85%.
Simply staying invested delivered a strong base-level return. Anything that an investor might have added through astute stock picks or sector allocation decisions would therefore have been gravy.
In other words, by reducing the potential volatility generated by betting on one time period, the investor could take more risks by overweighting other sectors or issuers.
While an investor could also overweight one particular time period by putting more cash to work, the idea would be — as with issuer diversification — to avoid putting too many eggs in one basket.
It is true that "settling” for a roughly 4% average quarterly return over 10 years was less lucrative than being in stocks only for bonanzas such as the 20.5% return in the second quarter of 2020 and the other six double-digit-return quarters of 2016 to 2025.
But no prudent investor can rely on profiting by consistently entering and exiting at the right moments. They would need a surefire market-timing formula, which, as far as I know, doesn’t exist.
The views expressed here are those of Marty Fridson, the publisher of Income Securities Investor. He is a past governor of the CFA Institute, consultant to the Federal Reserve Board of Governors, and Special Assistant to the Director for Deferred Compensation, Office of Management and Budget, The City of New York.
