MODERN VALUE INVESTING: 25 Tools to Invest With a Margin of Safety in Today's Financial Environment

by Sven Carlin

Temporal diversification enables you to be well diversified through your investing lifetime but without overpaying for diversification. For a simple example, let’s look at the Nasdaq index. The Nasdaq is the place to go for tech diversification, but the index is much more volatile than the S&P 500 and it gets crushed in recessions only to quickly turn into a bubble in periods of economic growth. Figure 40 The NASDAQ index Source: Author’s data Therefore, the logic behind temporal diversification would suggest diversifying your portfolio with tech only in periods of economic downturns. This seems a very strange concept and difficult to grasp especially in an environment where news is constant and economic cycles are easily forgotten, but the average economic cycle since 1945 in the U.S. has been 68.5 months from peak to peak. This means that in our average 40 year investment life span, we will have the opportunity to invest in 7 recessions.