Yesterday I had an article run at TSCM about ETF investing ideas for 2010. One ETF I wrote about will move bigger than the market in both directions, one should do well but have a relatively low correlation to the US market and the other is somewhat defensive.I tried to pick ETFs that have different attributes meaning that they each would/should react differently to whatever gets thrown at equity markets. The idea of responding differently to positive or negative influences is what diversification is all about.
If every stock or fund you own up more than the S&P 500 since the March low then all of those holdings would very likely drop more than the S&P 500 should it correct down at some point. Note that this is not a prediction about the market in the near term but instead this is a how portfolios work type of comment. If every stock you have has reacted to whatever has pushed the market up by rising 120% then you should expect they would drop more than the market in a decline. This would be true in a bear or bull phase. So if everything you have is up in the manner described above then you don't have a diversified portfolio.
Our visit to Maui ends to today as we are flying back to the mainland for Thanksgiving. The basketball at the Maui Invitational was very good. Game 1 was a squeaker and game 2 was not as close but still pretty good. The picture is of Yancy Gates from the University of Cincinnati. Aside from enjoying the hoops I have never had a run catching waves (body-surfing) like this trip. Great fun and great exercise if you stay in the water long enough.
3 comments:
There is diversified and then there is diversified.
You diversify to the extreme. I buy ETFs so I am diversified to a large extent from single stock loss like MCI and others in the past. But holding mostly Asian, emerging market, and commodity based sectors means I am not diversified across all types of investments. You are also correct that on pull backs my portfolio is affected by roughly a factor of 2x, but it goes up roughly 2x so in a bull market I can easily live with that.
I am willing to live with the level of diversification I have which many may feel is not enough, but I think there are problems with excessive diversification as well even if volatility is not one of them.
I don't disagree with Roger. BUT, diversification itself varies. Often during a crisis, things that did not correlate in the past begin to correlate to one's detriment. I rely on being nimble, selling without conscience when the going gets rough, using long moving averages like the 200 day.
Long question:
If 2010 sees a combination of any of the end of QE, rising inflation, rising interest rates, a stronger dollar, growing (albeit more slowly) unemployment and hints of stagflation, then under-weighting the more volatile sectors would seem to be more sensible than assuming the market will pull-back as quickly as it fell, surely?
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