Why diversification is not a viable strategy?

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hoops777
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Joined: Sun Apr 10, 2011 12:23 pm

Re: Why diversification is not a viable strategy?

Post by hoops777 » Mon Apr 22, 2019 12:36 pm

jainn wrote:
Mon Apr 22, 2019 12:14 pm
All the talk of gold reminds me of this episode from The Twilight Zone...

https://en.wikipedia.org/wiki/The_Rip_Van_Winkle_Caper
"The Rip Van Winkle Caper" is episode 60 of the American television anthology series The Twilight Zone. It originally aired on April 21, 1961 on CBS.

PLOT:
To escape the law after stealing $1 million worth of gold bricks (equal to $8.4 million today) from a train on its way from Fort Knox to Los Angeles, a band of four thieves, led by scientist-mastermind Farwell, hide in a secret cave in Death Valley, California. Farwell explains to his three assistants that he has designed suspended animation chambers in which they will sleep for approximately 100 years, figuring that by 2061 the gold will no longer be "hot" and they can sell it without arousing suspicion. DeCruz has reservations about going along with the plan, but all four undergo the procedure simultaneously.

When they wake up, all that remains of the mechanical engineer Erbie is his skeleton, his suspended animation chamber having been cracked by a falling rock. The demolitions expert, De Cruz, offers to guard the gold in the back of their truck while the firearms expert, Brooks, drives to civilization, but Brooks does not trust De Cruz and insists that he drive. De Cruz kills Brooks by running him over with the truck, then purposely ditches it in a ravine. Farwell and De Cruz now must walk through the desert in the summer heat, carrying as much gold as they can on their backs.

Farwell loses his canteen, and De Cruz sells him a sip of water from his canteen, for the price of one gold bar. When the water is nearly gone and the fee goes up to two bars, Farwell strikes De Cruz with a gold brick, killing him. Farwell continues, gradually discarding gold bars as their weight becomes increasingly burdensome. Finally, weak and dehydrated, he collapses.

Farwell regains consciousness and finds a man standing over him. Farwell feebly offers him his last gold bar in exchange for water and a ride to the nearest town, but dies before the man can respond. The man returns to his futuristic car and tells his wife the man is dead. He remarks about the oddity of Farwell offering him a gold bar as if it were valuable. She reminds him that people once used it for money, but he points out that was a long time ago, before they found a way to manufacture it.
I guess in really bad times you find out what is truly valuable :mrgreen:
K.I.S.S........so easy to say so difficult to do.

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fortyofforty
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Re: Why diversification is not a viable strategy?

Post by fortyofforty » Mon Apr 22, 2019 1:36 pm

pward wrote:
Mon Apr 22, 2019 12:28 pm
fortyofforty wrote:
Mon Apr 22, 2019 6:41 am
My position is trying to understand what makes gold so special? Gold has value because gold has value doesn't seem to cut it, does it? If it's a good enough explanation for you, then buy gold. Hoard gold. Store gold.

I haven't seen any explanation for advocating for gold that doesn't apply equally to any one of a number of collectible assets. I am still trying to figure out why gold is gold. The best anyone here can come up with is that gold is valuable because gold is valuable, gold has always been valuable because gold has always been valuable, and gold will always be valuable because gold will always be valuable. Logical? Not to me, and I try to find logic behind underlying assumptions.

I am not in a position of telling any other investor what is or isn't best for her. She has to make up her own mind. If she believes adding gold or cryptocurrency or art or classic cars provides diversification for her, she should buy and move on with her life.
You are correct in that gold does indeed share a lot of the same benefits of other collectable assets. Any hard asset is going to be an uncorrelated asset which if implemented properly will yield to higher risk adjusted returns, lower drawdowns, and quicker time to recover.

Now, gold has a couple advantages that the other hard assets don't have. First it is small enough that one can actually physically hold it. These days people no longer have physical stock or bond certificates, there's always some form of counter-party risk between them and their assets (usually multiple layers of counter-party risk). I personally think there is benefit to having some of your assets held in physical form. It's pretty hard to hold a barrel of oil physically. Gold is also super liquid no matter where you are in the world. Something like real estate (which is another fine form of physical asset) is very illiquid, especially in a crisis when you may need to sell. In a crisis, gold actually increases in liquidity if you need to sell. Lastly gold requires no knowledge and a bullion allocation can be implemented in a passive manner. I think someone can achieve a lot of the MPT benefits of gold with "collectables", since collectable items are typically a physical asset that is uncorrelated to stocks and bonds. However, collectables in the traditional sense require a lot of knowledge in what to buy, they take a lot of time in research, they are pretty illiquid, and are nowhere near a passive investment. If someone really gets a lot of joy out of collecting stamps, I think it's ok to allocate part of their portfolio to collectable stamps. There's absolutely nothing wrong with that. But, the average person is not going to get enough joy out of stamps to justify the time and effort needed to include that as an asset in a portfolio. Gold is a better blanket recommendation to the average Joe that just wants to simply buy, rebalance, and forget it.

There's also the added benefit that gold tends to respond to fear in a way that other physical assets do not. Gold tends to spike in times of economic or political crisis and general uncertainty, and this unique upside volatility in a crisis really compliments a portfolio of stocks and bonds really well. I have not seen another asset that reliably responds to crisis so violently to the upside. If you can find me another asset that will do the same with equal reliability I would be willing to consider it as well, as that is a very valuable and attractive trait to have in an asset to balance out the innate weaknesses of stocks and bonds respectively.
Thanks for as close to a logical answer as we're going to get. I really think it boils down to the reasons you articulated. Whether they hold up into the future is anyone's guess. Thanks for the response.
Indexing works, not because of magic, but because of math. | Diligentia. Vis. Celeritas. - Jeff Cooper | Original Vanguard Diehard

pward
Posts: 393
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Re: Why diversification is not a viable strategy?

Post by pward » Mon Apr 22, 2019 1:51 pm

fortyofforty wrote:
Mon Apr 22, 2019 1:36 pm
Thanks for as close to a logical answer as we're going to get. I really think it boils down to the reasons you articulated. Whether they hold up into the future is anyone's guess. Thanks for the response.
Yeah. I do hold a gold allocation, but I don't think it is a perfect asset. Then again I don't see any asset as perfect, I think they all have strengths and weaknesses and for someone that is doing a long term buy and rebalance strategy, using strengths in one asset to offset the weaknesses in another is definitely a good strategy. I simply have not found an asset that compliments the weaknesses of stocks and bonds as well as gold does. I also see no reason that this relationship would ever change. I mean, even in the December sell off in stocks gold went up, and it continued to go up until people started to actually believe that the stock rally was for real.

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