I have noticed that there is a lack of safe investment classes when reallocating my investment portfolio. Government bonds have become less desirable investments and short-term interest rates are also negative. The low-interest rates and central banks buybacks support stock markets to the point where stock markets have rallied for years. How can an investor make safer investments and still make returns in this situation? The investment horizon and use of time in investment allocation is something that the investor can use to make more secure investments.
Reducing risk is usually done by allocating money to multiple different asset classes. The notion is that different asset classes do differently in different economic conditions. The balance between risk and return is adjusted by sharing assets to three or more classes. The traditional asset classes are stocks, bonds, cash.
One factor is timing. Many people believe that timing is essential element when making a perfect investment. Usually, markets are irrational and have many changing factors. Some of the factors like natural disasters or political outcomes such as Brexit or presidential election outcome can’t be predicted.
Investor can use time as a tool. Instead of investing everything at once, an investor divides available resources into multiple parts and invests divided pieces over a long period. The benefit is the opportunity to invest in different market positions, avoiding investing everything in possible market turn.
The time horizon is something that is not easy to define. One year is a short time to diversify investments using time, market trends may last longer than a one year. Three years instead is a longer period including more market variation.
For example. You have 12 000€ to invest in ETFs. If you invest everything at once, there’s a risk that market situation is not favorable. Instead, there will be less risk if you divide 12 000€ to 12 pieces and invest 1000€ in ETFs, every 3 months. After 3 years the whole sum would be invested.
Usually, it’s a mistake to plan timing for investments. It’s alluring to buy when the markets are going up (buying expensive) and sell when markets are going down (selling cheap). By not following markets and investing time to time in smaller pieces, gives the advantage to avoid risks and frees the person from making decisions based on current markets.