Portfolio Managment 2009

http://money.cnn.com/2009/09/09/news/economy/financial_crisi…

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.

Tinker

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It is rare that I would venture to add something to one of Tinker’s posts…

First, I COMPLETELY AGREE with what he wrote.

Second, I would add that’s why when retired I’ll carry 3-4 years cash set aside… and stay fully invested with the rest… so that when the pull back occurs… I’ll live off that cash and not sell or pull out. Plus, that’s why my minimum retirement plan isn’t dependent on the market at all.

To Tinker’s post… Amen. Absolutely correct,

IMHO,
Mark

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I too completely agree with Tinker’s post (as is obvious to anyone who peeked at the portfolios I’ve occasionally posted here).

During the 2008-2009 period, my net worth dropped by around 6-8%. One of the saving graces of my recovery from the meltdown was putting about 10% of my net worth into AUD at around .6 to the USD. Within a couple of years I was able to pick up term accounts (like our CD’s) paying 8% as the AUD rose to parity with the USD. While the vast majority of the currency position was repatriated at that time, the vestages went into RIO and BHP (both on the Sydney exchange) as plays on the Chinese economy.
and adding (along with a decent size position in RDS-A) the inertia of natural resources to my overall asset mix.

If only I’ve had perfect forward vision as I have vision in the rear view mirror, I could select just the one or two strategies to whack the ball out of the park. That said, I’m always willing to learn and try new techniques (which explains why I’m here).

To be honest, while I track and try to understand the finances of each of the stocks acquired since coming here, I treat the lot as if it was a single position within the matrix of other assets owned for other purposes. So far, so good :slight_smile:

Jeff

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“If you held a mix of 35% U.S. stocks, 25% foreign stocks, 10% cash, and 30% fixed income…"

First, it’s arguable whether that truly is diversification. For instance, there’s no gold investment in there. Gold did quite well, even you waited until early 2009 to buy it, or even if you bought at a local high of early 2008.

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.

Yeah, this is the same point we’re all making. If you truly diversify then you do what everything does in total. Mostly things get better, so you do better. You’re not going to have the kinds of gains people on this board have been having for years, but you also won’t suffer the kinds of losses many here will when things get bad.

And it’s true that if you pay attention and are agile, you can claim most of the wins and avoid much of the losses, but that’s not for the faint of heart, the inexperienced, or for people who would rather do other things than constantly deal with investments.

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“If you held a mix of 35% U.S. stocks, 25% foreign stocks, 10% cash, and 30% fixed income…"

First, it’s arguable whether that truly is diversification. For instance, there’s no gold investment in there. Gold did quite well, even you waited until early 2009 to buy it, or even if you bought at a local high of early 2008.

By looking in the rear view mirror you can NOW argue anything you want, because you NOW KNOW what the right diversification THEN was.

I owned 100% US dividend paying Stocks- 0% foreign stocks-virtually no cash (Didn’t need any because they were all dividend/distribution paying stocks) -0% Fixed income securities and 0% gold- 0% Silver. The income generated by my portfolio was way above my needs–A good part of the growth came from the reinvesting of excess received income.

The portfolio went down with the market–The stocks continued paying their distributions-I paid all my bills on time (I have no other income) --Excess cash was reinvested at rock bottom prices to further drastically increase income due to increased share count totals and additional share price recovery. In a few months portfolio recovered to pre-crises days and has moved up many fold since then.

What will work next crisis time? I don’t know. And unfortunately neither does anyone else. I believe it is safer to seek income, because that comes from management saying "Hey investor we have money, here is your share, thanks for investing with us. For those seeking capital gains as opposed to income-- They are putting their faith in their fellow investor who is bidding up the price to a higher level. The problem is IMHO he probably doesn’t know any more about the company than you do–And his finger is probably on that sell button 24 hours a day seven days a week. (Just like yours)

If you are in a lifeboat in the middle of the ocean you need to be in with rowers and not others that are ready to dump you overboard if you close your eyes to sleep for a few minutes.

b&w

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