Why diversification is not a viable strategy?

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columbia
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Re: Why diversification is not a viable strategy?

Post by columbia » Fri Mar 08, 2019 1:03 pm

In this proposed scenario, are folks holding Swiss francs as a hedge to hyperinflation in the US?
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gmaynardkrebs
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Re: Why diversification is not a viable strategy?

Post by gmaynardkrebs » Fri Mar 08, 2019 1:44 pm

columbia wrote:
Fri Mar 08, 2019 1:03 pm
In this proposed scenario, are folks holding Swiss francs as a hedge to hyperinflation in the US?
SFrancs and Yen are pretty good hedges against dollar weakness, but the people I know who are concerned about hyperinflation seem to prefer physical gold and junk silver (pre 1965 circulating dimes, quarters, and halves). I fear higher inflation, but not hyperinflation in the US context. TIPS work for me for the former, but would probably be useless for the latter, which as I said, I view as unlikely in the extreme.

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Re: Why diversification is not a viable strategy?

Post by goodenyou » Fri Mar 08, 2019 2:56 pm

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Re: Why diversification is not a viable strategy?

Post by Thesaints » Fri Mar 08, 2019 3:24 pm

gmaynardkrebs wrote:
Fri Mar 08, 2019 1:44 pm
columbia wrote:
Fri Mar 08, 2019 1:03 pm
In this proposed scenario, are folks holding Swiss francs as a hedge to hyperinflation in the US?
SFrancs and Yen are pretty good hedges against dollar weakness, but the people I know who are concerned about hyperinflation seem to prefer physical gold and junk silver (pre 1965 circulating dimes, quarters, and halves). I fear higher inflation, but not hyperinflation in the US context. TIPS work for me for the former, but would probably be useless for the latter, which as I said, I view as unlikely in the extreme.
It makes a lot of sense that people worried about hyperinflation in the US may also be fans of physical gold stashes. I mean it makes a lot of sense that those two ideas go together, not that either one taken by itself is particularly worth of consideration.

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Re: Why diversification is not a viable strategy?

Post by Workable Goblin » Fri Mar 08, 2019 3:45 pm

KlangFool wrote:
Fri Mar 08, 2019 12:13 pm
Thesaints,

If the price of good goes up 50% in one month, why do you think anyone would accept paper currencies as payment?

KlangFool
Historically they have. Usually hyperinflationary periods are preceded by prolonged periods of high inflation that falls short of actual hyperinflation, so it's not like one day you wake up and prices are skyrocketing. Besides, even at 50% per month the price of, for example, a plane ticket to, say, Australia from Houston would only go from ~$840 to ~$1 260 (actually less than that, because I just peeked at what it would cost to get a 1-way ticket to Sydney tomorrow, so you wouldn't apply the full 50%...). If you're wealthy enough to be considering fleeing to Australia in the first place, this is annoying but hardly fatal. You could always leave for Mexico or Canada anyway, they're likely to be cheaper.

Prosaically, plenty of Venezuelans, Zimbabweans, etc. have managed to muddle through or even get out of their countries (to the point where there is a Venezuelan refugee crisis and a large Zimbabwean refugee population) during their hyperinflation crises, and I can be pretty sure given the numbers that have left--millions of people comprising a substantial portion of the population in the case of both Zimbabwe and Venezuela--that most of them didn't own any substantial amount of physical gold to pay for passage. So experimentally it doesn't seem that you actually need gold to get out of town when the going gets rough.

columbia
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Re: Why diversification is not a viable strategy?

Post by columbia » Sat Mar 09, 2019 7:08 am

We’re also assuming that hyperinflation could hit the US and not pretty much the rest of the planet? What countries will be on the exempt list and why?
If you leave your head in the sand for too long, you might get run over by a Jeep.

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tadamsmar
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Re: Why diversification is not a viable strategy?

Post by tadamsmar » Sat Mar 09, 2019 7:27 am

All by itself, diversification is not a viable strategy. You also need to save enough. Interestingly, "save enough" is not typically listed as an explicit Boglehead principle
Develop a workable plan
Invest early and often
Never bear too much or too little risk
Never try to time the market
Use index funds when possible
Keep costs low
Diversify
Minimize taxes
Keep it simple
Stay the course
https://www.bogleheads.org/wiki/Getting_started

Where is "save enough" on that list? Perhaps it is buried in "Develop a workable plan". As a practical matter, I don't think Boglehead overlook the need to save enough, but perhaps we should be more explicit about its importance.

columbia
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Re: Why diversification is not a viable strategy?

Post by columbia » Sat Mar 09, 2019 7:49 am

tadamsmar wrote:
Sat Mar 09, 2019 7:27 am
All by itself, diversification is not a viable strategy. You also need to save enough. Interestingly, "save enough" is not typically listed as an explicit Boglehead principle
Develop a workable plan
Invest early and often
Never bear too much or too little risk
Never try to time the market
Use index funds when possible
Keep costs low
Diversify
Minimize taxes
Keep it simple
Stay the course
https://www.bogleheads.org/wiki/Getting_started

Where is "save enough" on that list? Perhaps it is buried in "Develop a workable plan". As a practical matter, I don't think Boglehead overlook the need to save enough, but perhaps we should be more explicit about its importance.
Invest early and often reasonably covers that concern.
If you leave your head in the sand for too long, you might get run over by a Jeep.

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fortyofforty
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Re: Why diversification is not a viable strategy?

Post by fortyofforty » Sat Mar 09, 2019 8:11 am

KlangFool wrote:
Fri Mar 08, 2019 9:51 am
Folks,

There have been many threads about the US Stock market is overvalued and so on. And, most asset classes are overvalued. I had proposed a simple answer: diversification. So, I would like folks to explain why that is not a viable option.

Q) The US stock market is overvalued and the US economy may crash.
A) But the whole world instead.

Q) The whole world stock market is overvalued.
A) Do not be 100% stock, buy fixed income too.

Q) The stock market is not efficient
A) Then, use some active management like Wellington Fund or BRK.A or BRK.B

Q) The interest rate is going up. The bond will lose money.
A) If you believe that the interest rate is going up, keep your 30-years fixed rate mortgage.

Q) We may have short-term deflation.
A) Keep a bigger emergency fund in cash to hedge against deflation.

Q) We may have hyper-inflation.
A) Buy some physical gold jewelry or gold coins

So, please explain to me why someone with diversification across multiple assets classes is not using a viable strategy against future uncertainty? This is a know-nothing strategy. I know nothing. Hence, I have enough asset diversification to prepare any possibility.

KlangFool
You forgot one:

Q) Diversification reduces risk and more of anything is always better.
A) Then, diversification should work in fixed income products, too, so invest globally in the bond market.
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Re: Why diversification is not a viable strategy?

Post by lostdog » Sat Mar 09, 2019 8:14 am

Vanguard Total World Equity Index.

Vanguard Total World Bond Index.

Emergency cash of one or two years in Prime/Federal Money Markets or FDIC insured savings account.

Paid off home or enough income in the budget to pay rent.

An underground bunker in your back yard holding food, water, clothes, toiletries etc.. that will last a few years.


Just kidding around about the bunker and gun stuff. :)
Taxable: VLCAX and VFWAX || Tax Deferred: VTWAX

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Horton
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Re: Why diversification is not a viable strategy?

Post by Horton » Sun Mar 10, 2019 1:30 pm

KlangFool wrote:
Fri Mar 08, 2019 9:51 am
Folks,

There have been many threads about the US Stock market is overvalued and so on. And, most asset classes are overvalued. I had proposed a simple answer: diversification. So, I would like folks to explain why that is not a viable option.

Q) The US stock market is overvalued and the US economy may crash.
A) But the whole world instead.

Q) The whole world stock market is overvalued.
A) Do not be 100% stock, buy fixed income too.

Q) The stock market is not efficient
A) Then, use some active management like Wellington Fund or BRK.A or BRK.B

Q) The interest rate is going up. The bond will lose money.
A) If you believe that the interest rate is going up, keep your 30-years fixed rate mortgage.

Q) We may have short-term deflation.
A) Keep a bigger emergency fund in cash to hedge against deflation.

Q) We may have hyper-inflation.
A) Buy some physical gold jewelry or gold coins

So, please explain to me why someone with diversification across multiple assets classes is not using a viable strategy against future uncertainty? This is a know-nothing strategy. I know nothing. Hence, I have enough asset diversification to prepare any possibility.

KlangFool
KlangFool -

After reading this entire thread and coming back to your OP, I'm scratching my head a bit and wondering what we are trying to accomplish. Just to be clear, are you proposing that diversification is the best viable strategy?

Much of this thread is focused on "armageddon" type scenarios. Was that the original intent (i.e., is your diversification strategy intended to weather these storms) or did we just get off on a tangent?

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KlangFool
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Re: Why diversification is not a viable strategy?

Post by KlangFool » Sun Mar 10, 2019 1:38 pm

Horton wrote:
Sun Mar 10, 2019 1:30 pm
KlangFool wrote:
Fri Mar 08, 2019 9:51 am
Folks,

There have been many threads about the US Stock market is overvalued and so on. And, most asset classes are overvalued. I had proposed a simple answer: diversification. So, I would like folks to explain why that is not a viable option.

Q) The US stock market is overvalued and the US economy may crash.
A) But the whole world instead.

Q) The whole world stock market is overvalued.
A) Do not be 100% stock, buy fixed income too.

Q) The stock market is not efficient
A) Then, use some active management like Wellington Fund or BRK.A or BRK.B

Q) The interest rate is going up. The bond will lose money.
A) If you believe that the interest rate is going up, keep your 30-years fixed rate mortgage.

Q) We may have short-term deflation.
A) Keep a bigger emergency fund in cash to hedge against deflation.

Q) We may have hyper-inflation.
A) Buy some physical gold jewelry or gold coins

So, please explain to me why someone with diversification across multiple assets classes is not using a viable strategy against future uncertainty? This is a know-nothing strategy. I know nothing. Hence, I have enough asset diversification to prepare any possibility.

KlangFool
KlangFool -

After reading this entire thread and coming back to your OP, I'm scratching my head a bit and wondering what we are trying to accomplish. Just to be clear, are you proposing that diversification is the best viable strategy?

Much of this thread is focused on "armageddon" type scenarios. Was that the original intent (i.e., is your diversification strategy intended to weather these storms) or did we just get off on a tangent?
Horton,

<<Just to be clear, are you proposing that diversification is the best viable strategy? >>

There had been many threads about crashing US stock market, rising interest rate, inflation, hyperinflation, and so on.. My response to all those threads is this thread. Aka, my question is

If you are worried about those things, why won't the person consider diversification as a viable strategy to deal with those problems?

I would not use the word, "best" as part of my question. The goal is to use a good enough strategy. We would only what is "best" in hindsight.

KlangFool

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Re: Why diversification is not a viable strategy?

Post by nisiprius » Sun Mar 10, 2019 1:42 pm

columbia wrote:
Sat Mar 09, 2019 7:08 am
We’re also assuming that hyperinflation could hit the US and not pretty much the rest of the planet? What countries will be on the exempt list and why?
Switzerland and Venezuela.
the total income to date... has amounted to approximately one and a half million pounds starling in the Swiss francs and Venezuelan bolivars in which for reasons of prudence--they continue to be the hardest currencies in the world--we convert all our takings.
--fictional character Ernst Stavro Blofeld, head of SPECTRE, in Ian Fleming's 1961 James Bond novel, Thunderball
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

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Re: Why diversification is not a viable strategy?

Post by Slow FIRE » Sun Mar 10, 2019 2:12 pm

KlangFool wrote:
Fri Mar 08, 2019 10:28 am
A) If you can predict and prepare for it, it is not a Black Swan. Hyper-inflation, short-term deflation, rising interest rate and so on are not Black Swans. It had happened before and it could occur again.
KlangFool
I think the hard part here is the prediction part: we cannot predict these things.
Investing is a marathon, not a sprint.

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KlangFool
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Re: Why diversification is not a viable strategy?

Post by KlangFool » Sun Mar 10, 2019 2:15 pm

Slow FIRE wrote:
Sun Mar 10, 2019 2:12 pm
KlangFool wrote:
Fri Mar 08, 2019 10:28 am
A) If you can predict and prepare for it, it is not a Black Swan. Hyper-inflation, short-term deflation, rising interest rate and so on are not Black Swans. It had happened before and it could occur again.
KlangFool
I think the hard part here is the prediction part: we cannot predict these things.
Slow FIRE,

I disagreed. The hard part is to accept the fact that you cannot predict those things. Hence, be prepared is the only possible cause of action.

Why do you need to predict anything when you are prepared?

KlangFool

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Re: Why diversification is not a viable strategy?

Post by Vulcan » Sun Mar 10, 2019 2:17 pm

KlangFool wrote:
Sun Mar 10, 2019 2:15 pm
Why do you need to predict anything when you are prepared?
What exactly are you prepared for, KlangFool?
If you torture the data long enough, it will confess to anything. ~Ronald Coase

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KlangFool
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Re: Why diversification is not a viable strategy?

Post by KlangFool » Sun Mar 10, 2019 2:26 pm

Vulcan wrote:
Sun Mar 10, 2019 2:17 pm
KlangFool wrote:
Sun Mar 10, 2019 2:15 pm
Why do you need to predict anything when you are prepared?
What exactly are you prepared for, KlangFool?
Vulcan,

Everything on the list of the first post of this thread plus a bit more.

KlangFool

Slow FIRE
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Re: Why diversification is not a viable strategy?

Post by Slow FIRE » Sun Mar 10, 2019 2:30 pm

KlangFool wrote:
Sun Mar 10, 2019 2:15 pm
Slow FIRE,

I disagreed. The hard part is to accept the fact that you cannot predict those things. Hence, be prepared is the only possible cause of action.

Why do you need to predict anything when you are prepared?

KlangFool
We have a finite amount of time and a finite amount of resources. This alone makes us consider what is more important to prepare for and we cannot simply prepare for everything that is a possibility.
Investing is a marathon, not a sprint.

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KlangFool
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Re: Why diversification is not a viable strategy?

Post by KlangFool » Sun Mar 10, 2019 2:32 pm

Slow FIRE wrote:
Sun Mar 10, 2019 2:30 pm
KlangFool wrote:
Sun Mar 10, 2019 2:15 pm
Slow FIRE,

I disagreed. The hard part is to accept the fact that you cannot predict those things. Hence, be prepared is the only possible cause of action.

Why do you need to predict anything when you are prepared?

KlangFool
We have a finite amount of time and a finite amount of resources. This alone makes us consider what is more important to prepare for and we cannot simply prepare for everything that is a possibility.
Slow FIRE,

Then, prepared for whatever that you can and don't worry about things that you cannot prepare for.

KlangFool

JBTX
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Re: Why diversification is not a viable strategy?

Post by JBTX » Sun Mar 10, 2019 3:29 pm

Diversification is always a viable strategy. But it doesn't eliminate all types of risk. That really about sums it up.

columbia
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Re: Why diversification is not a viable strategy?

Post by columbia » Sun Mar 10, 2019 3:34 pm

Also note that there are many definitions of diversification. For some, it’s global weight in stocks and bonds (See thread about Sharpe portfolio), while for others it could be a large cap US fund and some treasuries. One could - and many do - contend that the latter is not diversified enough (for their tastes), but it meets any reasonable standard of being diversified.
If you leave your head in the sand for too long, you might get run over by a Jeep.

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Epsilon Delta
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Re: Why diversification is not a viable strategy?

Post by Epsilon Delta » Sun Mar 10, 2019 7:09 pm

nisiprius wrote:
Sun Mar 10, 2019 1:42 pm
the total income to date... has amounted to approximately one and a half million pounds starling ....
Clearly a fowl plot to corner the guano market.

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Re: Why diversification is not a viable strategy?

Post by Vulcan » Mon Mar 11, 2019 5:35 am

KlangFool wrote:
Sun Mar 10, 2019 2:26 pm
Vulcan wrote:
Sun Mar 10, 2019 2:17 pm
KlangFool wrote:
Sun Mar 10, 2019 2:15 pm
Why do you need to predict anything when you are prepared?
What exactly are you prepared for, KlangFool?
Everything on the list of the first post of this thread plus a bit more.
If it's on the list, it ain't no black swan.
If you torture the data long enough, it will confess to anything. ~Ronald Coase

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KlangFool
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Re: Why diversification is not a viable strategy?

Post by KlangFool » Mon Mar 11, 2019 9:42 am

Vulcan wrote:
Mon Mar 11, 2019 5:35 am
KlangFool wrote:
Sun Mar 10, 2019 2:26 pm
Vulcan wrote:
Sun Mar 10, 2019 2:17 pm
KlangFool wrote:
Sun Mar 10, 2019 2:15 pm
Why do you need to predict anything when you are prepared?
What exactly are you prepared for, KlangFool?
Everything on the list of the first post of this thread plus a bit more.
If it's on the list, it ain't no black swan.
Vulcan,

1) If it is a Black Swan, you cannot prepare for it.

2) I did not claim to be preparing for a Black Swan. In fact, my statement was if you can think of it and it had occurred in the past, it is not a Black Swan.

KlangFool

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Re: Why diversification is not a viable strategy?

Post by Random Walker » Mon Mar 11, 2019 9:52 am

KlangFool wrote:
Mon Mar 11, 2019 9:42 am

1) If it is a Black Swan, you cannot prepare for it.

2) I did not claim to be preparing for a Black Swan. In fact, my statement was if you can think of it and it had occurred in the past, it is not a Black Swan.

KlangFool
But one can prepare for a Black Swan. Don’t know what the cause will be, how long it will last, etc. But we do know that it will be a huge hit to equities and likely correlations of all risky assets will go towards 1. Prepare by holding a lot of high quality short-intermediate term fixed income and living below one’s means.

Dave

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KlangFool
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Re: Why diversification is not a viable strategy?

Post by KlangFool » Mon Mar 11, 2019 9:57 am

Random Walker wrote:
Mon Mar 11, 2019 9:52 am
KlangFool wrote:
Mon Mar 11, 2019 9:42 am

1) If it is a Black Swan, you cannot prepare for it.

2) I did not claim to be preparing for a Black Swan. In fact, my statement was if you can think of it and it had occurred in the past, it is not a Black Swan.

KlangFool
But one can prepare for a Black Swan. Don’t know what the cause will be, how long it will last, etc. But we do know that it will be a huge hit to equities and likely correlations of all risky assets will go towards 1. Prepare by holding a lot of high quality short-intermediate term fixed income and living below one’s means.

Dave
Random Walker,

How do you know that the Black Swan event would not affect your

A) high quality short-intermediate term fixed income

B) <<living below one’s means.>> is useless when you faced with hyperinflation and/or social unrest.

I know that I know nothing.

KlangFool

Random Walker
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Re: Why diversification is not a viable strategy?

Post by Random Walker » Mon Mar 11, 2019 10:13 am

You know nothing, and I probably know less! The circumstance you describe was not in the realm of my Black Swan thinking. I think of Black Swan as a huge adverse financial event. What you describe is even beyond that: political upheaval, war, crumbling of our institutions. That’s more like a dead swan than a black one. You are right, it can happen. Have you by chance read the short ebook by William Bernstein, Deep Risk? I’ve forgotten what’s in it, but it’s very relevant to concern over events like this. I’ll have to reread it.

https://www.amazon.com/Deep-Risk-Histor ... 1-fkmrnull

Dave

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Re: Why diversification is not a viable strategy?

Post by KlangFool » Mon Mar 11, 2019 11:11 am

Random Walker wrote:
Mon Mar 11, 2019 10:13 am
You know nothing, and I probably know less! The circumstance you describe was not in the realm of my Black Swan thinking. I think of Black Swan as a huge adverse financial event. What you describe is even beyond that: political upheaval, war, crumbling of our institutions. That’s more like a dead swan than a black one. You are right, it can happen. Have you by chance read the short ebook by William Bernstein, Deep Risk? I’ve forgotten what’s in it, but it’s very relevant to concern over events like this. I’ll have to reread it.

https://www.amazon.com/Deep-Risk-Histor ... 1-fkmrnull

Dave
Random Walker,

<<I think of Black Swan as a huge adverse financial event. >>

1) If you think of the Black Swan, it is not a Black Swan.

2) Why do you think that a huge adverse financial event could not lead to "political upheaval, war, crumbling of the institution"? It is a common occurrence.

" Have you by chance read the short ebook by William Bernstein, Deep Risk?"

3) Yes, I read the book.

https://www.amazon.com/Modern-Survival- ... 9870563457

4) Have you read this book?

5) Were you in Asia during the Asian Currency Crisis? I was.

KlangFool

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Re: Why diversification is not a viable strategy?

Post by ohai » Mon Mar 11, 2019 11:49 am

You cannot diversify against every scenario. In a really extreme event, all assets can go to zero. Zombies won't value USD or stocks.

For not-that-extreme events though, the year when you have a loss matters too, not just the final outcome after many years from then. Sure, assets recovered from 2009 to 2018, but what if you retired in 2008? You don't have 10 years to sit around waiting for your 100% stock portfolio to rebound.

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Re: Why diversification is not a viable strategy?

Post by pward » Mon Mar 11, 2019 8:33 pm

I have personally been greatly influenced by both Harry Browne and Ray Dalio. So I am totally in agreement. I think that a great majority of investors are under diversified, and most fail to appreciate the real risks in the U.S. dollar currency. I think that it is getting better with more people at least embracing international equities in recent years, but I do think that the current negative view against hard assets is unwarranted. I also do not think that we need "hyper inflation" for gold to respond. Just look at the 70's, we did not have hyper inflation, we had high inflation, and it performed admirably. Even a small 15% allocation to gold was enough to make an otherwise losing stock and bond portfolio profitable. I don't think gold will respond greatly to low inflation, or in a falling inflation environment (like the previously mentioned 80s), but if we have a sudden unexpected spike to say 5-6% inflation, which is very much in the realm of possibility, you better believe gold would shoot up violently while bonds and stocks plummeted. The investors with a hard asset allocation would be the only long term investors doing good in that environment. And all the while, they would be selling gold high to buy the beaten down stocks and bonds low to profit once again when inflation came back inline. I'm 37, I think the odds of me living through at least one period of high inflation are greater than not. Therefore, I prepare myself just in case. And if it doesn't happen, my portfolio is still set up to perform well regardless. I don't need any specific economic environment to make profit. I will make profit and my losses will be mitigated come what may.

Also, as a side note, one of the under appreciated traits of a diversified portfolio is more dependable returns, less reliance on luck, and much lower start date sensitivity: https://portfoliocharts.com/2016/07/25/ ... tion-plan/

ComeSailAway
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Re: Why diversification is not a viable strategy?

Post by ComeSailAway » Tue Mar 12, 2019 10:14 am

Consider the "Permanent" portfolio strateg:

25% Stock, 25% Bonds, 25 %Cash and 25% Gold. It has performed well over long periods of time.
Some variations of it exist that perform differently.

Google it for mire info.

hoops777
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Re: Why diversification is not a viable strategy?

Post by hoops777 » Tue Mar 12, 2019 5:22 pm

Diversification is simply common sense and too many brilliant minds make it way more complicated then it needs to be.It is actually almost comical and I believe quite ego driven.
K.I.S.S........so easy to say so difficult to do.

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KlangFool
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Re: Why diversification is not a viable strategy?

Post by KlangFool » Tue Mar 12, 2019 6:22 pm

hoops777 wrote:
Tue Mar 12, 2019 5:22 pm
Diversification is simply common sense and too many brilliant minds make it way more complicated then it needs to be.It is actually almost comical and I believe quite ego driven.
Common sense is highly uncommon.

KlangFool

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Re: Why diversification is not a viable strategy?

Post by bogglizer » Tue Mar 12, 2019 7:55 pm

It seems to me that planning for every possible eventuality only leads to distraction. What will I do in the zombocolypse? Guns, canned food? A more rational strategy is to make a plan that, on average, performs better than my peer group. If holding some gold will make my longer-term finances perform better than most upper middle class suburban families with 2.5 children, then I want to hear about it. Otherwise, I don't need to invest with meteor strikes in mind, because I don't have to run faster than the bear, just faster than you.

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Re: Why diversification is not a viable strategy?

Post by DonIce » Tue Mar 12, 2019 8:09 pm

The best assets in case of the "apocalypse" are personal health and fitness, adaptability, positive mental attitude and mental stability, a diverse set of practical skills or a key specialized skill, and a group of like-minded reliable individuals. These are also the most important assets sans apocalypse, of course.

When discussing financial assets and the appropriate allocation and diversification levels, it is probably not productive to consider and plan for scenarios much worse than the great depression.

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bottlecap
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Re: Why diversification is not a viable strategy?

Post by bottlecap » Tue Mar 12, 2019 8:34 pm

Diversification is a viable strategy.

There are many ways to diversify. If you tried to do them all, however, you would have a mess of a portfolio, probably wouldn't understand the potential effects, and could very well be worse off for it.

My advice would be to stop worrying about all the arguments made by others, unless you have some reason to be reasonably sure they are well-founded. Many aren't.

Investing is simple.

JT

BJJ_GUY
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Re: Why diversification is not a viable strategy?

Post by BJJ_GUY » Wed Mar 13, 2019 12:37 pm

KlangFool wrote:
Mon Mar 11, 2019 9:42 am
Vulcan wrote:
Mon Mar 11, 2019 5:35 am
KlangFool wrote:
Sun Mar 10, 2019 2:26 pm
Vulcan wrote:
Sun Mar 10, 2019 2:17 pm
KlangFool wrote:
Sun Mar 10, 2019 2:15 pm
Why do you need to predict anything when you are prepared?
What exactly are you prepared for, KlangFool?
Everything on the list of the first post of this thread plus a bit more.
If it's on the list, it ain't no black swan.
Vulcan,

1) If it is a Black Swan, you cannot prepare for it.

2) I did not claim to be preparing for a Black Swan. In fact, my statement was if you can think of it and it had occurred in the past, it is not a Black Swan.

KlangFool
Ironically, Nassim Taleb made the term ‘black swan’ part of our common vocabulary after he wrote a book which not only defined what it meant... but how he was ALWAYS PREPARED for it — and made a lot of money being long volatility (or positive convexity).

I may be wrong, but I’m thinking you can certainly prepare for potential black swans, not by having any idea what it might be, but by making informed decisions on likely assets to react a certain way in surprising and highly unlikely events.

Does that work?

Topic Author
KlangFool
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Joined: Sat Oct 11, 2008 12:35 pm

Re: Why diversification is not a viable strategy?

Post by KlangFool » Wed Mar 13, 2019 12:50 pm

BJJ_GUY wrote:
Wed Mar 13, 2019 12:37 pm
KlangFool wrote:
Mon Mar 11, 2019 9:42 am
Vulcan wrote:
Mon Mar 11, 2019 5:35 am
KlangFool wrote:
Sun Mar 10, 2019 2:26 pm
Vulcan wrote:
Sun Mar 10, 2019 2:17 pm

What exactly are you prepared for, KlangFool?
Everything on the list of the first post of this thread plus a bit more.
If it's on the list, it ain't no black swan.
Vulcan,

1) If it is a Black Swan, you cannot prepare for it.

2) I did not claim to be preparing for a Black Swan. In fact, my statement was if you can think of it and it had occurred in the past, it is not a Black Swan.

KlangFool
Ironically, Nassim Taleb made the term ‘black swan’ part of our common vocabulary after he wrote a book which not only defined what it meant... but how he was ALWAYS PREPARED for it — and made a lot of money being long volatility (or positive convexity).

I may be wrong, but I’m thinking you can certainly prepare for potential black swans, not by having any idea what it might be, but by making informed decisions on likely assets to react a certain way in surprising and highly unlikely events.

Does that work?
BJJ_GUY,

A rock fell from the sky and hit you in the head is a black swan. But, you were cycling and you wore a bicycle helmet as your usual procedure. So, you did not get killed by the rock from the sky aka Black Swan. In summary, you were lucky. You did not prepare for the Black Swan (rock from the sky) but you were saved by the bicycle helmet as your usual safety procedure.

Counting being lucky is not a good planning strategy. It is better to assume that you could be caught unprepared for some Black Swan. And, you have the flexibility to deal with it. Balance and diversification is the key.

KlangFool

hoops777
Posts: 2794
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Re: Why diversification is not a viable strategy?

Post by hoops777 » Wed Mar 13, 2019 1:16 pm

KlangFool wrote:
Tue Mar 12, 2019 6:22 pm
hoops777 wrote:
Tue Mar 12, 2019 5:22 pm
Diversification is simply common sense and too many brilliant minds make it way more complicated then it needs to be.It is actually almost comical and I believe quite ego driven.
Common sense is highly uncommon.

KlangFool
I think people trying to justify advice by over complicating things is more common.
K.I.S.S........so easy to say so difficult to do.

BJJ_GUY
Posts: 154
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Re: Why diversification is not a viable strategy?

Post by BJJ_GUY » Wed Mar 13, 2019 1:20 pm

KlangFool wrote:
Wed Mar 13, 2019 12:50 pm
BJJ_GUY wrote:
Wed Mar 13, 2019 12:37 pm
KlangFool wrote:
Mon Mar 11, 2019 9:42 am
Vulcan wrote:
Mon Mar 11, 2019 5:35 am
KlangFool wrote:
Sun Mar 10, 2019 2:26 pm

Everything on the list of the first post of this thread plus a bit more.
If it's on the list, it ain't no black swan.
Vulcan,

1) If it is a Black Swan, you cannot prepare for it.

2) I did not claim to be preparing for a Black Swan. In fact, my statement was if you can think of it and it had occurred in the past, it is not a Black Swan.

KlangFool
Ironically, Nassim Taleb made the term ‘black swan’ part of our common vocabulary after he wrote a book which not only defined what it meant... but how he was ALWAYS PREPARED for it — and made a lot of money being long volatility (or positive convexity).

I may be wrong, but I’m thinking you can certainly prepare for potential black swans, not by having any idea what it might be, but by making informed decisions on likely assets to react a certain way in surprising and highly unlikely events.

Does that work?
BJJ_GUY,

A rock fell from the sky and hit you in the head is a black swan. But, you were cycling and you wore a bicycle helmet as your usual procedure. So, you did not get killed by the rock from the sky aka Black Swan. In summary, you were lucky. You did not prepare for the Black Swan (rock from the sky) but you were saved by the bicycle helmet as your usual safety procedure.

Counting being lucky is not a good planning strategy. It is better to assume that you could be caught unprepared for some Black Swan. And, you have the flexibility to deal with it. Balance and diversification is the key.

KlangFool
Seems like a false argument. How do I diversify the way I ride a bike?

We’re talking about financial investments. The black swan event doesn’t have to be a market event, only an impact maybe second or third order effect.

If 90% of the risk in my portfolio is equity risk, I can certainly own things that are highly likely to do well when stocks get crushed (regardless of the reason, again, I concede not knowing what/when etc.).

Technically you are correct, we can move beyond investments, but I have no clue what value that is being that it’s a limitless discussion.

Anyway, the point I was simply point out was that it was funny and ironic that Taleb used his put protection trading as his prime anecdote to illustrate ways to always be prepared for unknowable events that may have outcomes of large negative magnitude

Topic Author
KlangFool
Posts: 15104
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Re: Why diversification is not a viable strategy?

Post by KlangFool » Wed Mar 13, 2019 1:28 pm

hoops777 wrote:
Wed Mar 13, 2019 1:16 pm
KlangFool wrote:
Tue Mar 12, 2019 6:22 pm
hoops777 wrote:
Tue Mar 12, 2019 5:22 pm
Diversification is simply common sense and too many brilliant minds make it way more complicated then it needs to be.It is actually almost comical and I believe quite ego driven.
Common sense is highly uncommon.

KlangFool
I think people trying to justify advice by over complicating things is more common.
Then, why do people think that diversification is not necessary? It is common sense.

KlangFool

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gmaynardkrebs
Posts: 1850
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Re: Why diversification is not a viable strategy?

Post by gmaynardkrebs » Wed Mar 13, 2019 1:29 pm

BJJ_GUY wrote:
Wed Mar 13, 2019 1:20 pm

If 90% of the risk in my portfolio is equity risk, I can certainly own things that are highly likely to do well when stocks get crushed (regardless of the reason, again, I concede not knowing what/when etc.).
And those things would be?

Topic Author
KlangFool
Posts: 15104
Joined: Sat Oct 11, 2008 12:35 pm

Re: Why diversification is not a viable strategy?

Post by KlangFool » Wed Mar 13, 2019 1:31 pm

BJJ_GUY wrote:
Wed Mar 13, 2019 1:20 pm
KlangFool wrote:
Wed Mar 13, 2019 12:50 pm
BJJ_GUY wrote:
Wed Mar 13, 2019 12:37 pm
KlangFool wrote:
Mon Mar 11, 2019 9:42 am
Vulcan wrote:
Mon Mar 11, 2019 5:35 am

If it's on the list, it ain't no black swan.
Vulcan,

1) If it is a Black Swan, you cannot prepare for it.

2) I did not claim to be preparing for a Black Swan. In fact, my statement was if you can think of it and it had occurred in the past, it is not a Black Swan.

KlangFool
Ironically, Nassim Taleb made the term ‘black swan’ part of our common vocabulary after he wrote a book which not only defined what it meant... but how he was ALWAYS PREPARED for it — and made a lot of money being long volatility (or positive convexity).

I may be wrong, but I’m thinking you can certainly prepare for potential black swans, not by having any idea what it might be, but by making informed decisions on likely assets to react a certain way in surprising and highly unlikely events.

Does that work?
BJJ_GUY,

A rock fell from the sky and hit you in the head is a black swan. But, you were cycling and you wore a bicycle helmet as your usual procedure. So, you did not get killed by the rock from the sky aka Black Swan. In summary, you were lucky. You did not prepare for the Black Swan (rock from the sky) but you were saved by the bicycle helmet as your usual safety procedure.

Counting being lucky is not a good planning strategy. It is better to assume that you could be caught unprepared for some Black Swan. And, you have the flexibility to deal with it. Balance and diversification is the key.

KlangFool
Seems like a false argument. How do I diversify the way I ride a bike?

We’re talking about financial investments. The black swan event doesn’t have to be a market event, only an impact maybe second or third order effect.

If 90% of the risk in my portfolio is equity risk, I can certainly own things that are highly likely to do well when stocks get crushed (regardless of the reason, again, I concede not knowing what/when etc.).

Technically you are correct, we can move beyond investments, but I have no clue what value that is being that it’s a limitless discussion.

Anyway, the point I was simply point out was that it was funny and ironic that Taleb used his put protection trading as his prime anecdote to illustrate ways to always be prepared for unknowable events that may have outcomes of large negative magnitude
BJJ_GUY,

The value is we need diversification to protect ourselves against our ignorance and unknowable.

KlangFool

BJJ_GUY
Posts: 154
Joined: Wed Mar 13, 2019 7:45 am

Re: Why diversification is not a viable strategy?

Post by BJJ_GUY » Wed Mar 13, 2019 1:34 pm

gmaynardkrebs wrote:
Wed Mar 13, 2019 1:29 pm
BJJ_GUY wrote:
Wed Mar 13, 2019 1:20 pm

If 90% of the risk in my portfolio is equity risk, I can certainly own things that are highly likely to do well when stocks get crushed (regardless of the reason, again, I concede not knowing what/when etc.).
And those things would be?
I don’t understand what the question is.

If I’m worried about the equities I own losing significant value for any possible reason I’m the world, I could buy OTM puts.

This assumes only one thing: if my stocks get smoked, the puts will move in the opposite direction. That’s it.

BJJ_GUY
Posts: 154
Joined: Wed Mar 13, 2019 7:45 am

Re: Why diversification is not a viable strategy?

Post by BJJ_GUY » Wed Mar 13, 2019 1:36 pm

KlangFool wrote:
Wed Mar 13, 2019 1:31 pm
BJJ_GUY wrote:
Wed Mar 13, 2019 1:20 pm
KlangFool wrote:
Wed Mar 13, 2019 12:50 pm
BJJ_GUY wrote:
Wed Mar 13, 2019 12:37 pm
KlangFool wrote:
Mon Mar 11, 2019 9:42 am


Vulcan,

1) If it is a Black Swan, you cannot prepare for it.

2) I did not claim to be preparing for a Black Swan. In fact, my statement was if you can think of it and it had occurred in the past, it is not a Black Swan.

KlangFool
Ironically, Nassim Taleb made the term ‘black swan’ part of our common vocabulary after he wrote a book which not only defined what it meant... but how he was ALWAYS PREPARED for it — and made a lot of money being long volatility (or positive convexity).

I may be wrong, but I’m thinking you can certainly prepare for potential black swans, not by having any idea what it might be, but by making informed decisions on likely assets to react a certain way in surprising and highly unlikely events.

Does that work?
BJJ_GUY,

A rock fell from the sky and hit you in the head is a black swan. But, you were cycling and you wore a bicycle helmet as your usual procedure. So, you did not get killed by the rock from the sky aka Black Swan. In summary, you were lucky. You did not prepare for the Black Swan (rock from the sky) but you were saved by the bicycle helmet as your usual safety procedure.

Counting being lucky is not a good planning strategy. It is better to assume that you could be caught unprepared for some Black Swan. And, you have the flexibility to deal with it. Balance and diversification is the key.

KlangFool
Seems like a false argument. How do I diversify the way I ride a bike?

We’re talking about financial investments. The black swan event doesn’t have to be a market event, only an impact maybe second or third order effect.

If 90% of the risk in my portfolio is equity risk, I can certainly own things that are highly likely to do well when stocks get crushed (regardless of the reason, again, I concede not knowing what/when etc.).

Technically you are correct, we can move beyond investments, but I have no clue what value that is being that it’s a limitless discussion.

Anyway, the point I was simply point out was that it was funny and ironic that Taleb used his put protection trading as his prime anecdote to illustrate ways to always be prepared for unknowable events that may have outcomes of large negative magnitude
BJJ_GUY,

The value is we need diversification to protect ourselves against our ignorance and unknowable.

KlangFool
I agree with this.

My swan comment was kind of a joke earlier, just based on where that had diverged.

On the diversification topic, I agree

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gmaynardkrebs
Posts: 1850
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Re: Why diversification is not a viable strategy?

Post by gmaynardkrebs » Wed Mar 13, 2019 1:49 pm

BJJ_GUY wrote:
Wed Mar 13, 2019 1:34 pm
gmaynardkrebs wrote:
Wed Mar 13, 2019 1:29 pm
BJJ_GUY wrote:
Wed Mar 13, 2019 1:20 pm

If 90% of the risk in my portfolio is equity risk, I can certainly own things that are highly likely to do well when stocks get crushed (regardless of the reason, again, I concede not knowing what/when etc.).
And those things would be?
I don’t understand what the question is.

If I’m worried about the equities I own losing significant value for any possible reason I’m the world, I could buy OTM puts.

This assumes only one thing: if my stocks get smoked, the puts will move in the opposite direction. That’s it.
That was question. Your answer is OTM puts. Makes sense. Problem is, I have very little idea how one does that. I've read a few explanations, but it looks quite complicated.

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Re: Why diversification is not a viable strategy?

Post by DonIce » Wed Mar 13, 2019 1:58 pm

gmaynardkrebs wrote:
Wed Mar 13, 2019 1:49 pm
That was question. Your answer is OTM puts. Makes sense. Problem is, I have very little idea how one does that. I've read a few explanations, but it looks quite complicated.
It's actually pretty simple, but like any form of insurance, the costs add up over time.

A put is just a contract that gives you the right to sell something (in this case equities) at a certain price. OTM (out of the money) means that price is below the current market level.

For example, you might buy a put that gives you the right to sell the S&P500 index at 2700, while it is currently at 2800. The put expires in a few months. If the index ends the period above 2700, your right to sell at 2700 becomes worthless (the option "expires worthless"). If the index goes below 2700, then your put is worth something. For example, if it goes to 2600, you make $100. And the put probably only originally cost like $1-3 or so.

But if you keep buying that put every few months, that cost adds up.

Ensuring your portfolio with puts will add a few % of drag on returns in the long run.

BJJ_GUY
Posts: 154
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Re: Why diversification is not a viable strategy?

Post by BJJ_GUY » Wed Mar 13, 2019 2:00 pm

I don't buy puts either. It's not a positive expected return strategy (systematic and long-term). That was an answer to the side conversation about black swans, and what Taleb did. For me, I have a super simple portfolio where correlation <1.0 (even in very choppy markets it doesn't get exactly to 1.0). Rebalancing into volatility is the most powerful form of juicing the diversification benefits.

On the options trading, or the tail hedging garbage... the funny thing is that Nassim Taleb's track record is pretty terrible, and his firm is garbage even within those that partake in tail hedge strategies. That said, I really enjoy his books and learned quite a bit from them. (Nothing here is useful to this topic, just sharing info in the event anyone was interested.)

hoops777
Posts: 2794
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Re: Why diversification is not a viable strategy?

Post by hoops777 » Wed Mar 13, 2019 2:15 pm

KlangFool wrote:
Wed Mar 13, 2019 1:28 pm
hoops777 wrote:
Wed Mar 13, 2019 1:16 pm
KlangFool wrote:
Tue Mar 12, 2019 6:22 pm
hoops777 wrote:
Tue Mar 12, 2019 5:22 pm
Diversification is simply common sense and too many brilliant minds make it way more complicated then it needs to be.It is actually almost comical and I believe quite ego driven.
Common sense is highly uncommon.

KlangFool
I think people trying to justify advice by over complicating things is more common.
Then, why do people think that diversification is not necessary? It is common sense.

KlangFool
People also think the world is flat.Everyone does not use common sense.My opinion is simply people who use common sense realize diversification is necessary in most cases.A couple of exceptions in my view would be possibly a very young person being 100 pct stocks or a retired person 100 pct fixed income,depending upon their circumstances.Even in those cases there is some diversification.It would be foolish for an 25 year old to go all in on an individual stock for example.
K.I.S.S........so easy to say so difficult to do.

BJJ_GUY
Posts: 154
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Re: Why diversification is not a viable strategy?

Post by BJJ_GUY » Wed Mar 13, 2019 2:26 pm

I believe you are now debating yourself

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