This is a 2009 article on diversification and what worked and what did not in the housing crash. Basically not much worked.
However, not mentioned here, is can you name a category dominating company that did not recover and go on to new highs within a few years?
Can you name a market dominating company, that if you had simply just invested in these best growth companies, kept contributing mostly, that you would not be far better off than diversifying as indicated in this article?
One excellent quote in the article”
“As Warren Buffett says, “The stock market has a very efficient way of transferring wealth from the impatient to the patient.””
That applies to holding the best and continuing to systematically invest, up and down, and I think the 2008/9 crash is evidence of this.
Here is what seemed to work diversification wise:
“If you held a mix of 35% U.S. stocks, 25% foreign stocks, 10% cash, and 30% fixed income (including government and high-quality corporate bonds), you would have lost just 28% between Sept. 1, 2008, and the market’s bottom of March 9. By comparison, the S&P 500 was down nearly 50%.”
Now let me know, how many people here would be better off today if they maintained this sort of diversification that actually worked? I mean, you don’t gain much, but you also don’t lose much.
The conventional wisdom following the 2009 crash:
“The question is, should you brace yourself for more nerve-jangling spikes? Yes, according to many investment pros, including Yale finance professor Roger Ibbotson, founder of Ibbotson Associates.
He expects the market to remain jittery for several years. Blame the unstable economy, which is likely to deliver more corporate earnings disappointments, and shell-shocked investors who are likely to react sharply to any bad news. "Given the higher volatility today,” says Ibbotsson, “you may need to ratchet down the risk in your portfolio.”
Really, you mean hunker down when everyone has panicked? Well, that is one way to diworsify your portfolio.
You can read the rest of the article for the rest. This article in Money, using stereotypical diversification models is completely short sighted and assumes all companies are equal, that you invest only in sectors, and there is no extraordinary investments out there.
It is short sighted because it stops in 2009 and makes no provision for whether or not the market just might recover.
The best diversification here was holding the best growth stocks. And I think that is the best diversification now.
Now this is different if you are retired, or close to retiring, etc. Each person has their own circumstances. But by 2011, you would have recovered your losses and more if you did not sell out on a panic, if you systematically contributed , and if you held the category killing growth stocks (trading out of course where necessary, such as we got out of 3D stocks when it became apparent there was no substance there).
So what plan of diversification worked better? The one where your downside was more limited, and you upside extremely more limited? Or the one that is based upon holding the best quality growth stocks?
A true bubble is a different matter like 2000, different discussion.
Seems clear to me that the stereiotypical money manager, financial planner, version of diversification is to assure mediocrity to everyone who has their money managed by them, no guarantee they won’t lose their money, but complete guarantee that they will not gain in extraordinary developments in human expansion.
Between diversification as specified here, and holding the best growth stocks, meaning the category killing such companies (and trading out when it is necessary) by 2011 who lost more money? By 2011 who made far more money?
If diversification is the reducing of risk, it seems that reducing your risk while capping your upside actually ended up adding to your risk if you understand that the market is forward looking, and that not every company reverts to the mean, and that there are extraordinary investments, like there are extraordinary quarterbacks, and holding them not only produced fewer losses (albeit much more volatility) but also far more gains.
Basically the Buffett quote in the end demonstrating its power. It also demonstrates a far greater understanding of how the market works than do these stereotypical diversification schemes whose only purpose is to reduce volatility and not so much net risk.
for your consideration, for what it is worth.