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How To Diversify Over Time

The day before, I wrote about a simple rule of thumb for putting $200 to good use. The article was inspired by my fellow Fool’s take on a question from one of our readers. That question was:

If we have S$200 to invest monthly, what are the shares that would be attractive to buy in terms of dividends and capital gains, say over a period of 20 years?

As my Foolish colleague Ser Jing shared about what are the options available, I would like to add another simple way to diversify, and suggest how a first time investor might put that S$200 per month to good use in the share market.

Spreading your cash

Primarily, diversification is an approach to reduce risk.

My fellow Fool David Kuo wrote about the merits of diversification across different companies before. Today, I would like to share another approach, that is to diversify across time.

Most Foolish investors may start with creating a thesis for a company. After creating an investing thesis, the next important step may be to give time for your own thesis to prove itself. In this way, it might not make sense to place all your chips in from the get-go, but instead let the company’s results prove out your thesis over time. For me, it typically doesn’t make much sense to put more money into the same company within a month or two.

But, why doesn’t it make sense?

One reason is that companies report on a quarterly or semi-annual basis. With the lack of new financial information, or management updates — it could mean that the movements of the share price in between reporting is just based on sentiment.

Also, keep in mind that one of the key advantages of Foolish long term investing would be learning about a company over long periods of time. So, by diversifying over time — this approach might just supplement the Foolish reader’s 20 year journey of learning, and investing.

Hey, but what if I miss out on the multi-bagging gains?

Individual investors might also want to keep in mind that if the company turns out to be the long term winner that we are seeking, there will be plenty of time to add to it in the future. As investing maestro Peter Lynch once quipped:

“Well, you’ve got plenty of time. You could have bought Wal-Mart ten years after it went public — Wal-Mart went public in 1970. You could have bought it ten years later and made 30 times your money. You still could have made 30 times your money because ten years after Wal-Mart went public they were only in 15 percent of the United States.”

In line with this thought, I have provided the example in my previous article on how a company like Dairy Farm International Holdings Ltd (SGX:D01) returned in excess of 270% between 3 Jan 2000 to 31 December 2004. Despite this, investors who added on 1 Jan 2005 would still have enjoyed a 520% return from the start of 2005 till 9 September 2014.

The Final Foolish Word

Investing maestro Peter Lynch once quipped that the secret to investing might just be to “water your flowers, and cut off your weeds”. Hence, it stands to reason that if we have found a company that has outperformed for sufficiently long periods of time, the best thing to do might just be to add to the company (“water your flowers”). So, if the investment horizon is 20 years, the practical way may be just to add to it over time. Continue your investing journey with us by signing up for a FREE subscription to The Motley Fool’s weekly investing newsletter, Take Stock SingaporeSign up here to learn how you can grow your wealth in the years ahead.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chin Hui Leong doesn’t own shares in any companies mentioned.