diversification is to investing as it is to
everything else in life
controlling the overall risk profile
Diversification will dampen the volatility exposure to any one company, sector or region allowing your portfolio to sustain hits from negatively performing investments. Additionally, having a diversified portfolio will dampen your market entry point risk. Every investment moves up or down at differing magnitudes and even directions to each other. Early in an upswing market for one investment is great but being too late in an upcycle market is not, and timing your entry point is difficult if not near impossible. A well-designed diversified portfolio will incorporate a mix of volatile investments that over time should produce both capital appreciation and more consistently accumulate dividend income and compound.
Time is your best friend in markets and in many ways is the mirror to volatility. They work in concert but as opposite factors. The rule of thumb for portfolio construction is with more time the more exposure to volatility and conversely, the less time the less exposure to volatility. As asset classes fall in and out of favor, a longer time horizon allows for investments to fully perform to their potential and why longer duration assets that are relatively more volatile are appropriate for longer time horizon portfolios. Conversely, the shorter the time horizon of a portfolio, the more asset selection needs to be focused on lower volatility investments.
Time and volatility work on investments differently. Each investment has its own unique volatility profile and thus needs to be embedded in a portfolio that has the time to handle, tame, and extract its value as volatility. This is why asset class selection or rather: volatility selection is in many ways determined by investment time horizons. The investment selection for shorter duration portfolios must be imbued with less volatility and conversely, the asset class exposures for longer term portfolios should imbed more volatility so as to expose the portfolio to higher potential returns.
The point of investing as opposed to speculating or trading is to outperform the effects of inflation and allow the portfolio to participate in the productive expansion of a capitalistic economy over the long term; while, achieving this in a manner that is right sized for the investor's risk tolerance and goals.