“Diversification Is Your Buddy!” Part 2

The U.S equity markets are making new all-time highs. Of course at one time the Dow Jones Industrial 30 had an all-time high of 200 then 1000 then 2000 then …….18,000.


Some investors are considering moving their money out of the stock market. Because the markets are at all-time highs. The market has to go down because it is at an all-time high.

Since no one can predict the future, this is a huge mistake.

You must decide if you are a gambler/speculator or an investor. Gamblers believe they can out guess the market and avoid all losses. The gamblers have proven numerous times to be wrong, in the long run. One may get ‘lucky’ but no one can consistently market time.

In markets like these diversification is your buddy.

Proper diversification spreads risk across various asset classes with varying return characteristics or dissimilar price movement. Simply said: they don’t do the same thing at the same time.

Most investors are narrowly diversified into top performing funds or classes of the last five to ten years. They often feel diversified but aren’t.

To be diversified means including classes or types of funds in your portfolio that did poorly over the last five to ten years. If you do this, your portfolio will look and perform very differently from your neighbors’ or friends’.

There will always be something in a truly diversified portfolio that you will not like. This will be true every year.

It seems every day I am asked what will the market do today or this week or this year?  Or what stock will do best? Or can you beat the market? Or is now a good time to buy into the market? Or is now a good time to sell?

Those of you which are my clients own portfolios which are professionally diversified and rebalanced much like the large pension funds.

Over time these portfolios will help you successfully accomplish your investment goals.


There will always be someone touting a ‘new’ strategy that will protect or insulate you from the current risks. These Wall Street bullies want you to believe they can predict the future and earn you stock market returns with Treasury bill risk. What you end up with is Treasury bill returns and stock market risk.

Find an investor coach/fiduciary adviser who will help you build a prudent portfolio designed for you. And more importantly keep you disciplined during both up and down markets.

Process and discipline will lead to a successful outcome.

To succeed in investing you must own equities….globally diversify…..rebalance.

Dissimilar Price Movement is Your Key Portfolio Protection

Investors are always looking for the best asset category to invest their portfolio. If only someonecould tell them when to buy stocks or bonds or real estate or Cds or annuities or even gold and then tell them when to sell.

Asset Allocation on Wikibook
Asset Allocation on Wikibook (Photo credit: Wikipedia)

The Wall Street bullies want you to believe that this someone exists.

Remember these bullies make money whenever you trade, buy or sell. It doesn’t matter to the bullies whether you make money or not, they just don’t care.

All that matters to the bullies is that you keep on trading.

A number of advisors reportedly predicted the 2008 crash and got their clients out of the market. Unfortunately, for investors, these advisors ability is a matter of luck and NOT skill. Their ability to repeat this impressive feat is virtually zero.

There is no correlation between an advisors’ ability to time the market in the past and their ability to do so in the future.

What these bullies are really telling you is that they can predict the future. They want you to believe they can get you out of the market and buy back in at the right time.

Unfortunately, when you look at their long term results you will realize that they do not beat or even match a prudently diversified portfolio.

Your portfolio is diversified when you own asset categories with price movements that do not mimic each other. Two or more asset categories may both have high-expected returns but perform very differently in the short term. This difference can be measured and used to build a diverse portfolio.

Said another way there is a mathematic and scientific method to develop a diversified portfolio. This in no way involves accurately predicting the future.

This portfolio will be built with your specific risk preference which will help you reach your long term financial goals.

A Portfolio MRI would determine your level of diversification.

One very important lesson here is that NO ONE can predict the future. Remember the ‘talking heads’ on television have one goal and that is to sell more advertising. Their goal is NOT to help you prudently invest.

In order to succeed in reaching your long term investing goals you must own equities…..globally diversify……rebalance.

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What Does It Mean To Rebalance Your Portfolio?

Price-Earnings ratios as a predictor of twenty...
Price-Earnings ratios as a predictor of twenty-year returns. From Irrational Exuberance, 2d ed. source (Photo credit: Wikipedia)

There are three simple rules to successful investing

  • Own Equities
  • Globally Diversify
  • Rebalance

Although these are simple in theory, they are very difficult for individual investors to diligently follow. To own equities seems the easiest to understand. However, when the stock markets around the globe are volatile, as they are now, equities are emotionally difficult to own. We need help to maintain our discipline.

To globally diversify your portfolio with low correlated asset classes is much more difficult to understand and beyond the scope of this short message.  At some point you should understand how a prudent portfolio is built to gain peace of mind in building your financial future.

This brings us to rebalance. What does it mean to rebalance your portfolio? Essentially it means buy low and sell high. As an example if international stocks in your portfolio are down, as they are now, and fixed income is up.  We will sell fixed income and buy international stocks. Sell high and buy low. There is no prediction of the future involved while the rebalance brings the portfolio back to its initial target allocations.

Remember no one can consistently predict the future. To succeed in investing we must follow an academically backed scientific strategy when building the right portfolio for each of us. Once built, we must remain disciplined to our plan.

Please send me any questions or comments.

As always we should own equities….globally diversify……rebalance.

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