Diversity Won't Heal A Bummer Investment

Some who have lost more money than they expected in recent downturns are throwing stones at investment asset allocation and diversity. This article recommends being realistic in your expectations. Going "all in" on one, or a few, investments is too big a bet for most people. A few years ago at a meeting I attended a gentleman remarked he wasn't worried about the fate of the dollar as "most of his money was in gold".  He was my hero that evening, but I didn't have the temperament to follow suit. Nonetheless, the fiat fantasy allocation is an attempt to deal with the risks posed by paper debt money.

My allocation model is a guide. Wide ranges are used rather than discrete numbers. For example, my target percentage for US bonds is 10%. If my US bond holdings fall within 6 - 14 percent, I'm on track.  If my US bond holdings are greater than 15%, I can't purchase more US bonds and this asset class is available for rebalancing. If my US bond holdings are less than 6%, I might buy more. Cash must be available and a good investment must be identified. There's no sense investing solely for the purpose of hitting an allocation target. As Frank Shostak said in 2000 when giving an Austrian perspective on diversification:

"Proponents of modern portfolio theory argue that diversification is the key to the creation of the best possible consistent returns. We argue that one must focus on the profitability of the investments in a portfolio, before one considers their contribution to the portfolio's diversification. Consequently, whilst we agree with the general principle of diversification, we believe that the profitability of an individual investment should be the primary consideration for the investor."

Since the March 2009 lows nearly all long investments have fared well. Logically, a period when most investments trade lower is certain. During those periods, diversification into cash makes sense. Taking big losses, averaging down, and "buy and hold forever" are out.  Asset allocation and trend following are in.  Now that's hope and change you can believe in.  Sorry, election eve and all.