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speedybure (< 20)

Diversification: Dynamic Shift Of This Paradigm

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April 06, 2009 – Comments (2)


College Professors, money managers, etc, have always preached diversification as a neccessity in any ones portfolio and as rule of thumb for asset allocation. This held true until the bursting of our bubble economy starting in 2008, at least their version of what diversification really is. I agree with asset diversification , much in a much a safer, and in my opinion the only way to reduce risk. Though Henry Hazzlitt predicted this is his book written after Bretton-Woods, a fiat money system always ends in ruin. What is diversification then?? My interpretation in a nutshell is as follows

 

1) Own some precious metals ( gold and silver ) and add to them when they are out of favor. They are the only international currency that retains its store of value. 

 

2) Keep some of those overseas i.e Swiss Bank account deposit box, the Perth Mint in Australian and the Canadian prestige accounts

 

 3) Never buy financials in any country- they are and will continue to be inherently insolvent as long as every loan is not backed by gold.

 

 4) Own equities denominated in a variety of currencies. The reason being is although many think the dow or s&p components are cheap, Equities in Japan, China, Australia, New Zealand are two or three times as cheap.

 

 5) The economic superpower will be China so get into these equities while they continue to trade at significant discounts relative to USA.

 

 

 6) Real Estate is not an appreciating asset with the exception of buying a house in a city or country you think will be popular in the future. 

 

 

 7) No one can tell you an equity portfolio is diversified. I consider my portfolio diversified despite the fact it only contains miners, oil, and agriculture equities.

 

 

 8) i worked at morgan stanely in college, and I was disgusted with the lack of knowledge of every broker there. My lasy day was when i heard some broker trying to push apple when it was nearing 200.  

2 Comments – Post Your Own

#1) On April 06, 2009 at 11:54 PM, sentinelbrit (89.39) wrote:

One of the worst mistakes a money manager can make is to overlook the correlations in his or her portfolio. I remember a quant manager believed that his portfolio was diversified. He'd run the numbers and was about equal weighted on a broad sector basis (against the s&p 500).  What he failed to realize was that within each sector he held high beta stocks e.g. in tech he was overweight semi-conductors, in oils he was overweight drillers and in healthcare he was overweight biotech stocks. Needless to say, the fund underperformed terribly after 2000. The pain got so great that in 2002 he reduced his overweights. You guessed it. Those stocks finally rallied big time just after he sold them.

Your portfolio seems very much geared to one outcome - namely, commodity price inflation. This is a big bet.

I think investors under-estimate the potential of the US market. China may be where the growth is going to be, but it's stock market is incredibly illiquid, and not very broad. In contrast, the US market is very liquid and incredibly broad in terms of sectors and market cap. I wouldn't disagree with holding foreign stocks, but you're missing out on a huge part of the market by concentrating on commodity related stocks.

 

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#2) On April 07, 2009 at 4:20 PM, speedybure (< 20) wrote:

I didn't mean for people to do that, I just wanted to advise people to have some exposure. On the topic of oil and wheat, the rise won't be due to price inflation, rather the gap between supply and demand. Oil, barring any large discovery will last 15-20 years. (Jim rogers said 15, and i can't disagree with king of commodittees. Wheat is much easier to find the data. I've looked over the past deacades production and consuption and 9 of 10 years the gap has increased, the 1 year have slight increase.

Anyway as i said Diversification in equities is arbitrary, only you can make the call. Even if you focus on one industry are a few, as long as it is adequately hedged, it is diversified 

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