The Importance Of Temporal Diversification

2025-03-11 06:30:00 ET

Summary

• The stock market is a near-coin flip over short periods of time, but the further out you go, the more predictable it becomes.
• We all have an inherent asset-liability mismatch in our financial lives because we spend in the present but we accrue income and asset returns in the long term.
• This is why the stock market is so behaviorally challenging. It’s a long-term instrument that exacerbates that asset-liability mismatch in our lives.
• This is what makes diversification such a powerful tool. The investor who buys a 60/40 stock/bond portfolio isn’t just diversifying across assets. They are diversifying across time.

Originally published on March 10, 2025

As I write this, the US stock market is down -2.5% on the day. It’s down about -8.5% from its peak just a few weeks ago. Then again, it’s up 11% over the last year, 38% over three years and 110% over 5 years. This is what the stock market does. Over long periods of time, the stock market will go up in value because corporations accrue revenues and profits over long periods of time. In the short term, however, the stock market is virtually unpredictable. Here’s the probability of positive stock market returns over rolling periods:

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