Why diversification is not a viable strategy?

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KlangFool
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Why diversification is not a viable strategy?

Post by KlangFool » 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) Buy 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
Last edited by KlangFool on Sun Mar 10, 2019 2:26 pm, edited 1 time in total.

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simplesimon
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Re: Why diversification is not a viable strategy?

Post by simplesimon » Fri Mar 08, 2019 10:03 am

People are bored and need something to argue about.

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nisiprius
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Re: Why diversification is not a viable strategy?

Post by nisiprius » Fri Mar 08, 2019 10:16 am

To what question, exactly, is "diversification" the answer? Language like "the answer/not the answer" is meaningless unless you have stated the question.

Let's suppose this is the question: "In the year 1999, I attended a retirement seminar conducted by my employer's 401(k) provider, in which we were encouraged to plan our retirement based on the expectation that the US stock market would continue to return its historical of 7% real. (That's a true story). Since then, the average return of the stock market has been only 2.6% real. Many experts are suggesting that it won't be much higher than that going forward. Without changing my plan, what can I substitute for US stocks that will return 7% real per year (with no more risk?)"

The answer is: nothing. There is no answer.

"Diversification" is not the answer to that question, because none of the diversifiers you mention can be confidently expected to return 7% real per year.

Many vaunted "diversifiers" outperformed the stock market during 2000-2002, only to underperform it during 2008-2009, leaving only the subtle mathematical advantages over less "diversified" portfolios.
Last edited by nisiprius on Fri Mar 08, 2019 10:25 am, edited 1 time in total.
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smitcat
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Re: Why diversification is not a viable strategy?

Post by smitcat » Fri Mar 08, 2019 10:20 am

simplesimon wrote:
Fri Mar 08, 2019 10:03 am
People are bored and need something to argue about.
Yes - I think this is exactly the case. With the last 10 years producing no real market corrections and low unemployment there appears to be a diversion to worrying about any thing that comes to mind.
I suspect this will be greatly reduced once a larger problem actually occurs.

aristotelian
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Re: Why diversification is not a viable strategy?

Post by aristotelian » Fri Mar 08, 2019 10:23 am

It is not a cure all. You still need a long time horizon. And there is always the possibility of a Black Swan that is worse than the previous worst case scenario.

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KlangFool
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Re: Why diversification is not a viable strategy?

Post by KlangFool » Fri Mar 08, 2019 10:25 am

nisiprius wrote:
Fri Mar 08, 2019 10:16 am
To what question, exactly, is "diversification" the answer? Language like "the answer/not the answer" is meaningless unless you have stated the question.

Let's suppose this is the question: "In the year 1999, I attended a retirement seminar conducted by my employer's 401(k) provider, in which we were encouraged to plan our retirement based on the expectation that the US stock market would continue to return its historical of 7% real. Since then, the average return of the stock market has been only 2.6% real. Many experts are suggesting that it won't be much higher than that going forward. Without changing my plan, what can I substitute for US stocks that will return 7% real per year (with no more risk?)"

The answer is: nothing. There is no answer.

"Diversification" is not the answer to that question, because none of the diversifiers you mention can be confidently expected to return 7% real per year.
nisiprius,

1) You are correct. To low return possibility, the only viable answer is a high saving rate and/or flexible withdrawal strategy in retirement.

2) You incorrect too. Just because of the US stock market return X%, it does not mean the International stock market will return the same way.

KlangFool

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KlangFool
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Re: Why diversification is not a viable strategy?

Post by KlangFool » Fri Mar 08, 2019 10:28 am

aristotelian wrote:
Fri Mar 08, 2019 10:23 am
It is not a cure all. You still need a long time horizon. And there is always the possibility of a Black Swan that is worse than the previous worst case scenario.
aristotelian,

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.

B) The possibility of Black Swan does not negate the usefulness of diversification.

C) The goal is not a cure-all.

KlangFool

dbr
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Re: Why diversification is not a viable strategy?

Post by dbr » Fri Mar 08, 2019 10:33 am

nisiprius wrote:
Fri Mar 08, 2019 10:16 am

The answer is: nothing. There is no answer.
I think this answers the OP. Diversification cannot solve the problem that what one wants is not available at any given time. The questions in the OP were basically that question.

But here is an example. A very important concept is that one may not want to take as much risk as investing everything in stocks. The solution to that is to not invest everything in stocks but to put some things in a investment where the risk is less. That is "diversification" but I am not sure the idea rises from the obvious to a level that deserves being given a name. It is also true that the kind of risk involved in the two cases is different, but that was not really the point. If I could have invested in a selection of stocks that had less risk (and probably less return) that would have served the need as well. This idea of diversification is an obviously viable strategy because it is a way to match one's investment selection to the risk one is willing to take, given that one has to trade off "expected" but not certain return.

On the other hand there is a highly technical meaning of diversification which obtains when the risks in two investments are not correlated. In that case a mix of the two investments can have less risk than the simple average of the risks while the return obtains the simple average of the returns. This causes a figure of merit such as ratio of return to risk to increase and also allows more compound growth for that return than would be obtained if the risk were higher. I guess it is arguable whether or not this meets the definition of viable strategy.

RJC
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Re: Why diversification is not a viable strategy?

Post by RJC » Fri Mar 08, 2019 10:38 am

Isn't there a harm in too much diversification? It may save you from a black swan event but won't it offset gains in any meaningful direction?
Last edited by RJC on Fri Mar 08, 2019 10:44 am, edited 1 time in total.

BogleMelon
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Re: Why diversification is not a viable strategy?

Post by BogleMelon » Fri Mar 08, 2019 10:43 am

KlangFool wrote:
Fri Mar 08, 2019 9:51 am
Q) We may have hyper-inflation.
A) Buy some physical gold jewelry or gold coins
I would answer that: Buy I-bonds
"One of the funny things about stock market, every time one is buying another is selling, and both think they are astute" - William Feather

aristotelian
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Re: Why diversification is not a viable strategy?

Post by aristotelian » Fri Mar 08, 2019 10:44 am

KlangFool wrote:
Fri Mar 08, 2019 10:28 am
aristotelian wrote:
Fri Mar 08, 2019 10:23 am
It is not a cure all. You still need a long time horizon. And there is always the possibility of a Black Swan that is worse than the previous worst case scenario.
aristotelian,

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.

B) The possibility of Black Swan does not negate the usefulness of diversification.

C) The goal is not a cure-all.

KlangFool
I am not arguing against diversification, just putting forward an explanation for why it might not be a viable strategy against uncertainty, or what someone might mean when they say something to that effect. It is a risk reducer but it doesn't eliminate risk.

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KlangFool
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Re: Why diversification is not a viable strategy?

Post by KlangFool » Fri Mar 08, 2019 10:57 am

RJC wrote:
Fri Mar 08, 2019 10:38 am
Isn't there a harm in too much diversification? It may save you from a black swan event but won't it offset gains in any meaningful direction?
RJC,

This is the tradeoff.

KlangFool

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

Post by KlangFool » Fri Mar 08, 2019 11:00 am

BogleMelon wrote:
Fri Mar 08, 2019 10:43 am
KlangFool wrote:
Fri Mar 08, 2019 9:51 am
Q) We may have hyper-inflation.
A) Buy some physical gold jewelry or gold coins
I would answer that: Buy I-bonds
BogleMelon,

https://www.investopedia.com/terms/h/hyperinflation.asp
<<Hyperinflation occurs when the inflation rate exceeds 50% for a period of a month.>>

KlangFool

dbr
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Re: Why diversification is not a viable strategy?

Post by dbr » Fri Mar 08, 2019 11:02 am

KlangFool wrote:
Fri Mar 08, 2019 10:57 am
RJC wrote:
Fri Mar 08, 2019 10:38 am
Isn't there a harm in too much diversification? It may save you from a black swan event but won't it offset gains in any meaningful direction?
RJC,

This is the tradeoff.

KlangFool
Right, the whole idea is that diversification is about risk. It is supposed to be a cardinal rule of investing that risk and return are trade-offs though it is possible to take risks that do not increase expected return and that those risks actually can be eliminated without reducing return. Such risks are actually called "diversifiable" risk as the model is holding a collection of similar stocks rather than one stock. In that case risk is reduced but not return.

samsdad
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Re: Why diversification is not a viable strategy?

Post by samsdad » Fri Mar 08, 2019 11:07 am

KlangFool wrote:
Fri Mar 08, 2019 11:00 am
BogleMelon wrote:
Fri Mar 08, 2019 10:43 am
KlangFool wrote:
Fri Mar 08, 2019 9:51 am
Q) We may have hyper-inflation.
A) Buy some physical gold jewelry or gold coins
I would answer that: Buy I-bonds
BogleMelon,

https://www.investopedia.com/terms/h/hyperinflation.asp
<<Hyperinflation occurs when the inflation rate exceeds 50% for a period of a month.>>

KlangFool
If we have an inflation rate that exceeds 50% over the period of a month, the diversification of my portfolio is
going to be the last of my worries. Getting out of the country before it becomes impossible to do so would be the first thing on my list of things to do.

acegolfer
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Re: Why diversification is not a viable strategy?

Post by acegolfer » Fri Mar 08, 2019 11:14 am

First, before you read the rest, I want to clarify that I'm not against diversification. "Diversification lowers risk" is one principle that all finance academia agree on. It's a mathematical conclusion.

But I want to point out one misconception that I have seen in BH over and over. The "risk" in this principle is measured by the standard deviation of portfolio return. OTOH, if you have a different definition of risk, then diversification can increase these risks.

One common reason given by multi-factor investing advocates is factor diversification. True, it can lower the standard deviation by investing in other risk factors. But remember that by adding non-market risk factors, you are actually increasing those risks.

In sum, multi-factor investing can lower the standard deviation but at the expense of increasing other risks.

Nowizard
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Re: Why diversification is not a viable strategy?

Post by Nowizard » Fri Mar 08, 2019 11:25 am

Love for debate is sometimes the goal of those who have won the game, sometimes the result of limited investment knowledge, sometimes a reflection of the anxiety most of us at least occasionally feel with any complex topic that has very helpful guidelines but no absolutely definitive answer? Is there life elsewhere in the universe?

Tim

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KlangFool
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Re: Why diversification is not a viable strategy?

Post by KlangFool » Fri Mar 08, 2019 11:29 am

samsdad wrote:
Fri Mar 08, 2019 11:07 am
KlangFool wrote:
Fri Mar 08, 2019 11:00 am
BogleMelon wrote:
Fri Mar 08, 2019 10:43 am
KlangFool wrote:
Fri Mar 08, 2019 9:51 am
Q) We may have hyper-inflation.
A) Buy some physical gold jewelry or gold coins
I would answer that: Buy I-bonds
BogleMelon,

https://www.investopedia.com/terms/h/hyperinflation.asp
<<Hyperinflation occurs when the inflation rate exceeds 50% for a period of a month.>>

KlangFool
If we have an inflation rate that exceeds 50% over the period of a month, the diversification of my portfolio is
going to be the last of my worries. Getting out of the country before it becomes impossible to do so would be the first thing on my list of things to do.
samsdad,

You would need some physical gold to pay your way out of the country. Are you buying any gold?

KlangFool

Seasonal
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Re: Why diversification is not a viable strategy?

Post by Seasonal » Fri Mar 08, 2019 11:31 am

As noted, defining diversification is a controversial topic. I believe it means weighting by market cap over publicly available securities.

This would not be a viable strategy if your non-portfolio characteristics are markedly different from the characteristics of the "average" investor (average probably weighted by portfolio size, not the average individual). This is a fine theory, but figuring out differences is non-trivial and therefore not particularly helpful.

This would also not be a viable strategy if you are markedly better at portfolio construction than the market, for example, you are better at picking winners or avoiding losers. It's a good bet that you, the reader of this post, is not such an individual.

Consider the market a giant computer for computing the right portfolio for investors overall, taking into account its estimates of future returns, correlations, risks (however defined) and everything else people consider when constructing a portfolio. Consider why the market portfolio is not right for you or what you know that wasn't properly taken into account. Absent a good answer, it's likely right for you. Otherwise, you already know what to do. h/t to John Norstad (viewtopic.php?t=245914) for this image.

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

Post by KlangFool » Fri Mar 08, 2019 11:32 am

acegolfer wrote:
Fri Mar 08, 2019 11:14 am
First, before you read the rest, I want to clarify that I'm not against diversification. "Diversification lowers risk" is one principle that all finance academia agree on. It's a mathematical conclusion.

But I want to point out one misconception that I have seen in BH over and over. The "risk" in this principle is measured by the standard deviation of portfolio return. OTOH, if you have a different definition of risk, then diversification can increase these risks.

One common reason given by multi-factor investing advocates is factor diversification. True, it can lower the standard deviation by investing in other risk factors. But remember that by adding non-market risk factors, you are actually increasing those risks.

In sum, multi-factor investing can lower the standard deviation but at the expense of increasing other risks.
acegolfer,

<<The "risk" in this principle is measured by the standard deviation of portfolio return. >>

This is not the risk that I am addressing in this thread. I am talking about: recession, deflation, inflation, hyperinflation, rising interest rate and so on.

KlangFool

BogleMelon
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Re: Why diversification is not a viable strategy?

Post by BogleMelon » Fri Mar 08, 2019 11:36 am

KlangFool wrote:
Fri Mar 08, 2019 11:29 am
samsdad wrote:
Fri Mar 08, 2019 11:07 am
KlangFool wrote:
Fri Mar 08, 2019 11:00 am
BogleMelon wrote:
Fri Mar 08, 2019 10:43 am
KlangFool wrote:
Fri Mar 08, 2019 9:51 am
Q) We may have hyper-inflation.
A) Buy some physical gold jewelry or gold coins
I would answer that: Buy I-bonds
BogleMelon,

https://www.investopedia.com/terms/h/hyperinflation.asp
<<Hyperinflation occurs when the inflation rate exceeds 50% for a period of a month.>>

KlangFool
If we have an inflation rate that exceeds 50% over the period of a month, the diversification of my portfolio is
going to be the last of my worries. Getting out of the country before it becomes impossible to do so would be the first thing on my list of things to do.
samsdad,

You would need some physical gold to pay your way out of the country. Are you buying any gold?

KlangFool
Won't I-bonds still keep up in that case?
How about stocks? Hyperinflation = stores selling at way higher prices = higher nominal revenues = higher valuation for their shares (Yah i know, not necessarily of course there is a risk here)

P.S: I came from one of these countries how from time to time get hyperinflation, but they have no ibonds or index funds. Investing is super complicated there.
"One of the funny things about stock market, every time one is buying another is selling, and both think they are astute" - William Feather

Thesaints
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Re: Why diversification is not a viable strategy?

Post by Thesaints » Fri Mar 08, 2019 11:38 am

Besides the fact that gold is not a good hedge against inflation, diversification is not a magic pill. It will simply tend to reduce the effects of a market downturn.
As such, it is a little unclear what the OP means by “viable”.

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

Post by KlangFool » Fri Mar 08, 2019 11:41 am

BogleMelon wrote:
Fri Mar 08, 2019 11:36 am
KlangFool wrote:
Fri Mar 08, 2019 11:29 am
samsdad wrote:
Fri Mar 08, 2019 11:07 am
KlangFool wrote:
Fri Mar 08, 2019 11:00 am
BogleMelon wrote:
Fri Mar 08, 2019 10:43 am

I would answer that: Buy I-bonds
BogleMelon,

https://www.investopedia.com/terms/h/hyperinflation.asp
<<Hyperinflation occurs when the inflation rate exceeds 50% for a period of a month.>>

KlangFool
If we have an inflation rate that exceeds 50% over the period of a month, the diversification of my portfolio is
going to be the last of my worries. Getting out of the country before it becomes impossible to do so would be the first thing on my list of things to do.
samsdad,

You would need some physical gold to pay your way out of the country. Are you buying any gold?

KlangFool
Won't I-bonds still keep up in that case?
How about stocks? Hyperinflation = stores selling at way higher prices = higher nominal revenues = higher valuation for their shares (Yah i know, not necessarily of course there is a risk here)

P.S: I came from one of these countries how from time to time get hyperinflation, but they have no ibonds or index funds. Investing is super complicated there.
BogleMelon,

No, stock and bond would not help you. Only gold can help you.

<<P.S: I came from one of these countries how from time to time get hyperinflation,>>

And, they deal with this by buying gold. Those countries tend to have a very well developed system of trading gold.

KlangFool
Last edited by KlangFool on Fri Mar 08, 2019 11:43 am, edited 1 time in total.

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

Post by KlangFool » Fri Mar 08, 2019 11:43 am

Thesaints wrote:
Fri Mar 08, 2019 11:38 am
Besides the fact that gold is not a good hedge against inflation, diversification is not a magic pill. It will simply tend to reduce the effects of a market downturn.
As such, it is a little unclear what the OP means by “viable”.
Thesaints,

Gold is not a hedge against inflation. It is a hedge against hyperinflation.

KlangFool

Thesaints
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Re: Why diversification is not a viable strategy?

Post by Thesaints » Fri Mar 08, 2019 11:43 am

I suspect in such countries you might be even better off holding $100 bills instead of gold coins...

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

Post by KlangFool » Fri Mar 08, 2019 11:44 am

Thesaints wrote:
Fri Mar 08, 2019 11:43 am
I suspect in such countries you might be even better off holding $100 bills instead of gold coins...
Thesaints,

You are assuming no hyperinflation in the USA.

KlangFool

Thesaints
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Re: Why diversification is not a viable strategy?

Post by Thesaints » Fri Mar 08, 2019 11:47 am

KlangFool wrote:
Fri Mar 08, 2019 11:43 am
Thesaints,

Gold is not a hedge against inflation. It is a hedge against hyperinflation.

KlangFool
I’m also not sure of what “hyperinflation” is.
Gold price went down during the 80’s and not just in real terms, but actually in nominal terms too!

Thesaints
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Re: Why diversification is not a viable strategy?

Post by Thesaints » Fri Mar 08, 2019 11:49 am

KlangFool wrote:
Fri Mar 08, 2019 11:44 am
Thesaints wrote:
Fri Mar 08, 2019 11:43 am
I suspect in such countries you might be even better off holding $100 bills instead of gold coins...
Thesaints,

You are assuming no hyperinflation in the USA.

KlangFool
500€ bills, then, or 1000 CHF... and if there has to be “hyperinflation” everywhere, then why do you expect someone will give you anything in exchange of a gold coin ?

BogleMelon
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Re: Why diversification is not a viable strategy?

Post by BogleMelon » Fri Mar 08, 2019 11:50 am

KlangFool wrote:
Fri Mar 08, 2019 11:41 am
BogleMelon wrote:
Fri Mar 08, 2019 11:36 am
KlangFool wrote:
Fri Mar 08, 2019 11:29 am
samsdad wrote:
Fri Mar 08, 2019 11:07 am
KlangFool wrote:
Fri Mar 08, 2019 11:00 am


BogleMelon,

https://www.investopedia.com/terms/h/hyperinflation.asp
<<Hyperinflation occurs when the inflation rate exceeds 50% for a period of a month.>>

KlangFool
If we have an inflation rate that exceeds 50% over the period of a month, the diversification of my portfolio is
going to be the last of my worries. Getting out of the country before it becomes impossible to do so would be the first thing on my list of things to do.
samsdad,

You would need some physical gold to pay your way out of the country. Are you buying any gold?

KlangFool
Won't I-bonds still keep up in that case?
How about stocks? Hyperinflation = stores selling at way higher prices = higher nominal revenues = higher valuation for their shares (Yah i know, not necessarily of course there is a risk here)

P.S: I came from one of these countries how from time to time get hyperinflation, but they have no ibonds or index funds. Investing is super complicated there.
BogleMelon,

No, stock and bond would not help you. Only gold can help you.

<<P.S: I came from one of these countries how from time to time get hyperinflation,>>

And, they deal with this by buying gold. Those countries tend to have a very well developed system of trading gold.

KlangFool
You didn't answer me, wouldn't Ibonds keep up with hyperinflation? If yes, then why gold?
Yes they buy gold, but they get poorer. Somehow, gold there doesn't help much. Maybe of the third men very high commissions that come with buying and selling..
"One of the funny things about stock market, every time one is buying another is selling, and both think they are astute" - William Feather

Hiker-Biker
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Re: Why diversification is not a viable strategy?

Post by Hiker-Biker » Fri Mar 08, 2019 11:54 am

KlangFool wrote:
Fri Mar 08, 2019 11:43 am
Thesaints wrote:
Fri Mar 08, 2019 11:38 am
Besides the fact that gold is not a good hedge against inflation, diversification is not a magic pill. It will simply tend to reduce the effects of a market downturn.
As such, it is a little unclear what the OP means by “viable”.
Thesaints,

Gold is not a hedge against inflation. It is a hedge against hyperinflation.

KlangFool
I don't intend to own gold. If it gets to that point, you are at risk of someone, or a group of people taking your gold, food supplies, etc. No, I am not advocating being a prepper...but it could happen.

That is why I'm considering Portugal as a potential retirement location.

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

Post by KlangFool » Fri Mar 08, 2019 12:00 pm

Thesaints wrote:
Fri Mar 08, 2019 11:47 am
KlangFool wrote:
Fri Mar 08, 2019 11:43 am
Thesaints,

Gold is not a hedge against inflation. It is a hedge against hyperinflation.

KlangFool
I’m also not sure of what “hyperinflation” is.
Gold price went down during the 80’s and not just in real terms, but actually in nominal terms too!
Thesaints,

Hyperinflation = at least 50% inflation in one month.

KlangFool

heyyou
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Re: Why diversification is not a viable strategy?

Post by heyyou » Fri Mar 08, 2019 12:00 pm

The uncertainty and risk will always be a step ahead of whatever we mere mortals conjure as solutions for them.
We are driving into a blind future, looking in the rear view mirror, while carrying a load of whatever did well in the past.
We may as well, just get used to that since it will not change in our lifetimes.

Insert Churchill remark about democracy with its significant faults, as being only better than everything else that has been tried so far.

JBTX
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Re: Why diversification is not a viable strategy?

Post by JBTX » Fri Mar 08, 2019 12:03 pm

I'm not sure what the thread is trying to accomplish. Diversification helps some problems, but there are theoretical outcomes where it doesn't fix. And it depends on how broadly you diversify. You a could put 1/2 of your portfolio in gold ibonds and tips and REITS/real estate and be much more protected against inflation, but it will likely be at the expense of likely long term returns.

Investing is about maximizing your return for likely outcomes and minimizing risk of less likely outcomes. But you can't direct address every potential negative outcome. You are playing probabilities.
Last edited by JBTX on Fri Mar 08, 2019 12:04 pm, edited 1 time in total.

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

Post by KlangFool » Fri Mar 08, 2019 12:03 pm

BogleMelon wrote:
Fri Mar 08, 2019 11:50 am
KlangFool wrote:
Fri Mar 08, 2019 11:41 am
BogleMelon wrote:
Fri Mar 08, 2019 11:36 am
KlangFool wrote:
Fri Mar 08, 2019 11:29 am
samsdad wrote:
Fri Mar 08, 2019 11:07 am

If we have an inflation rate that exceeds 50% over the period of a month, the diversification of my portfolio is
going to be the last of my worries. Getting out of the country before it becomes impossible to do so would be the first thing on my list of things to do.
samsdad,

You would need some physical gold to pay your way out of the country. Are you buying any gold?

KlangFool
Won't I-bonds still keep up in that case?
How about stocks? Hyperinflation = stores selling at way higher prices = higher nominal revenues = higher valuation for their shares (Yah i know, not necessarily of course there is a risk here)

P.S: I came from one of these countries how from time to time get hyperinflation, but they have no ibonds or index funds. Investing is super complicated there.
BogleMelon,

No, stock and bond would not help you. Only gold can help you.

<<P.S: I came from one of these countries how from time to time get hyperinflation,>>

And, they deal with this by buying gold. Those countries tend to have a very well developed system of trading gold.

KlangFool
You didn't answer me, wouldn't Ibonds keep up with hyperinflation? If yes, then why gold?
Yes they buy gold, but they get poorer. Somehow, gold there doesn't help much. Maybe of the third men very high commissions that come with buying and selling..
BogleMelon,

<<You didn't answer me, wouldn't Ibonds keep up with hyperinflation?>>

No. If the price of good goes up 50% in one month, it would not.

<<If yes, then why gold?>>

Folks will no longer accept currency for payment. They would accept gold instead.

<<Yes they buy gold, but they get poorer. Somehow, gold there doesn't help much. Maybe of the third men very high commissions that come with buying and selling.>>

Not in my home country or most part of East Asia. The commission is fixed and regulated.

KlangFool

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

Post by KlangFool » Fri Mar 08, 2019 12:05 pm

Hiker-Biker wrote:
Fri Mar 08, 2019 11:54 am
KlangFool wrote:
Fri Mar 08, 2019 11:43 am
Thesaints wrote:
Fri Mar 08, 2019 11:38 am
Besides the fact that gold is not a good hedge against inflation, diversification is not a magic pill. It will simply tend to reduce the effects of a market downturn.
As such, it is a little unclear what the OP means by “viable”.
Thesaints,

Gold is not a hedge against inflation. It is a hedge against hyperinflation.

KlangFool
I don't intend to own gold. If it gets to that point, you are at risk of someone, or a group of people taking your gold, food supplies, etc. No, I am not advocating being a prepper...but it could happen.

That is why I'm considering Portugal as a potential retirement location.
Hiker-Biker,

You need to pay your way to Portugal. How do you plan to do that without some gold?

KlangFool

Thesaints
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Re: Why diversification is not a viable strategy?

Post by Thesaints » Fri Mar 08, 2019 12:05 pm

KlangFool wrote:
Fri Mar 08, 2019 12:00 pm
Thesaints wrote:
Fri Mar 08, 2019 11:47 am
KlangFool wrote:
Fri Mar 08, 2019 11:43 am
Thesaints,

Gold is not a hedge against inflation. It is a hedge against hyperinflation.

KlangFool
I’m also not sure of what “hyperinflation” is.
Gold price went down during the 80’s and not just in real terms, but actually in nominal terms too!
Thesaints,

Hyperinflation = at least 50% inflation in one month.

KlangFool
Ok, then dollars, or euros are better than gold. Put yourself in the seller shoes: hard for him to assess gold purity, weight easily. A $100 bill is instead easily checked (either is genuine USA, or genuine NK, but nobody can tell the difference).
And if also USA and EU are experiencing 50% inflation monthly, then there will be nothing to buy in your country to begin with.

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

Post by KlangFool » Fri Mar 08, 2019 12:07 pm

JBTX wrote:
Fri Mar 08, 2019 12:03 pm
I'm not sure what the thread is trying to accomplish. Diversification helps some problems, but there are theoretical outcomes where it doesn't fix. And it depends on how broadly you diversify. You a could put 1/2 of your portfolio in gold ibonds and tips and REITS/real estate and be much more protected against inflation, but it will likely be at the expense of likely long term returns.

Investing is about maximizing your return for likely outcomes and minimizing risk of less likely outcomes. But you can't direct address every potential negative outcome. You are playing probabilities.
JBTX,

<<Investing is about maximizing your return >>

I disagreed. Investing is about achieving your financial goals. Return is just one of the goals. It is not the only goal.

KlangFool

Thesaints
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Re: Why diversification is not a viable strategy?

Post by Thesaints » Fri Mar 08, 2019 12:09 pm

If you got less return than your set goal, you failed. If you got more return, then you took on too much risk.

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

Post by KlangFool » Fri Mar 08, 2019 12:09 pm

Thesaints wrote:
Fri Mar 08, 2019 12:05 pm
KlangFool wrote:
Fri Mar 08, 2019 12:00 pm
Thesaints wrote:
Fri Mar 08, 2019 11:47 am
KlangFool wrote:
Fri Mar 08, 2019 11:43 am
Thesaints,

Gold is not a hedge against inflation. It is a hedge against hyperinflation.

KlangFool
I’m also not sure of what “hyperinflation” is.
Gold price went down during the 80’s and not just in real terms, but actually in nominal terms too!
Thesaints,

Hyperinflation = at least 50% inflation in one month.

KlangFool
Ok, then dollars, or euros are better than gold. Put yourself in the seller shoes: hard for him to assess gold purity, weight easily.
Thesaints,

When hyperinflation hits, those problems are small as compared to trying to assess the value of any paper currencies.

KlangFool

Thesaints
Posts: 2921
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Re: Why diversification is not a viable strategy?

Post by Thesaints » Fri Mar 08, 2019 12:10 pm

I don’t think I follow you anymore...

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

Post by KlangFool » Fri Mar 08, 2019 12:11 pm

Thesaints wrote:
Fri Mar 08, 2019 12:09 pm
If you got less return than your set goal, you failed. If you got more return, then you took on too much risk.
You have to survive in order to succeed. Return only meaningful if you survive financially.

KlangFool

Topic Author
KlangFool
Posts: 14127
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Re: Why diversification is not a viable strategy?

Post by KlangFool » Fri Mar 08, 2019 12:13 pm

Thesaints wrote:
Fri Mar 08, 2019 12:10 pm
I don’t think I follow you anymore...
Thesaints,

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

KlangFool

Thesaints
Posts: 2921
Joined: Tue Jun 20, 2017 12:25 am

Re: Why diversification is not a viable strategy?

Post by Thesaints » Fri Mar 08, 2019 12:14 pm

KlangFool wrote:
Fri Mar 08, 2019 12:11 pm
Thesaints wrote:
Fri Mar 08, 2019 12:09 pm
If you got less return than your set goal, you failed. If you got more return, then you took on too much risk.
You have to survive in order to succeed. Return only meaningful if you survive financially.

KlangFool
How can you get your set return and not “survive” ? Unless the financial plan was suicidal, that is...

Thesaints
Posts: 2921
Joined: Tue Jun 20, 2017 12:25 am

Re: Why diversification is not a viable strategy?

Post by Thesaints » Fri Mar 08, 2019 12:15 pm

KlangFool wrote:
Fri Mar 08, 2019 12:13 pm
Thesaints wrote:
Fri Mar 08, 2019 12:10 pm
I don’t think I follow you anymore...
Thesaints,

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

KlangFool
Because in Zimbabwe, Argentina, or wherever you get 50% monthly inflation the value of that $100 bill increases by just as much in local currency.

JBTX
Posts: 5536
Joined: Wed Jul 26, 2017 12:46 pm

Re: Why diversification is not a viable strategy?

Post by JBTX » Fri Mar 08, 2019 12:22 pm

KlangFool wrote:
Fri Mar 08, 2019 12:07 pm
JBTX wrote:
Fri Mar 08, 2019 12:03 pm
I'm not sure what the thread is trying to accomplish. Diversification helps some problems, but there are theoretical outcomes where it doesn't fix. And it depends on how broadly you diversify. You a could put 1/2 of your portfolio in gold ibonds and tips and REITS/real estate and be much more protected against inflation, but it will likely be at the expense of likely long term returns.

Investing is about maximizing your return for likely outcomes and minimizing risk of less likely outcomes. But you can't direct address every potential negative outcome. You are playing probabilities.
JBTX,

<<Investing is about maximizing your return >>

I disagreed. Investing is about achieving your financial goals. Return is just one of the goals. It is not the only goal.

KlangFool
Right below that I said minimize negative outcomes. Your goal is an expected value. Expected value is determined by returns and risks via probabilities. I stand by what I wrote.

samsdad
Posts: 745
Joined: Sat Jan 02, 2016 6:20 pm

Re: Why diversification is not a viable strategy?

Post by samsdad » Fri Mar 08, 2019 12:33 pm

Hiker-Biker wrote:
Fri Mar 08, 2019 11:54 am
KlangFool wrote:
Fri Mar 08, 2019 11:43 am
Thesaints wrote:
Fri Mar 08, 2019 11:38 am
Besides the fact that gold is not a good hedge against inflation, diversification is not a magic pill. It will simply tend to reduce the effects of a market downturn.
As such, it is a little unclear what the OP means by “viable”.
Thesaints,

Gold is not a hedge against inflation. It is a hedge against hyperinflation.

KlangFool
I don't intend to own gold. If it gets to that point, you are at risk of someone, or a group of people taking your gold...
+1. Gold makes you a target on one hand, and no one knows its value or if it’s fake on the other. The best hedge against hyperinflation is an airplane ticket and a way to blend in and dissappear wherever it is that you’re gonna go to—probably illegally—for the time being.

JBTX
Posts: 5536
Joined: Wed Jul 26, 2017 12:46 pm

Re: Why diversification is not a viable strategy?

Post by JBTX » Fri Mar 08, 2019 12:47 pm

samsdad wrote:
Fri Mar 08, 2019 12:33 pm
Hiker-Biker wrote:
Fri Mar 08, 2019 11:54 am
KlangFool wrote:
Fri Mar 08, 2019 11:43 am
Thesaints wrote:
Fri Mar 08, 2019 11:38 am
Besides the fact that gold is not a good hedge against inflation, diversification is not a magic pill. It will simply tend to reduce the effects of a market downturn.
As such, it is a little unclear what the OP means by “viable”.
Thesaints,

Gold is not a hedge against inflation. It is a hedge against hyperinflation.

KlangFool
I don't intend to own gold. If it gets to that point, you are at risk of someone, or a group of people taking your gold...
+1. Gold makes you a target on one hand, and no one knows its value or if it’s fake on the other. The best hedge against hyperinflation is an airplane ticket and a way to blend in and dissappear wherever it is that you’re gonna go to—probably illegally—for the time being.
Foriegn currency denominated investments and would also be good for domestic hyperinflation. The problem with planning for hyperinflation is that is often accompanied by unusual and extraordinary government actions, which are beyond the normal scope of mere financial and investment planning.

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

Post by KlangFool » Fri Mar 08, 2019 12:51 pm

Folks,

If you are not worried about something, then, you do not need to be prepared for it. But, if you are worried enough about some risk, then, you should do something to prepare and negate the risk to a certain extent.

KlangFool

Topic Author
KlangFool
Posts: 14127
Joined: Sat Oct 11, 2008 12:35 pm

Re: Why diversification is not a viable strategy?

Post by KlangFool » Fri Mar 08, 2019 12:55 pm

Thesaints wrote:
Fri Mar 08, 2019 12:14 pm
KlangFool wrote:
Fri Mar 08, 2019 12:11 pm
Thesaints wrote:
Fri Mar 08, 2019 12:09 pm
If you got less return than your set goal, you failed. If you got more return, then you took on too much risk.
You have to survive in order to succeed. Return only meaningful if you survive financially.

KlangFool
How can you get your set return and not “survive” ? Unless the financial plan was suicidal, that is...
Thesaints,

In order for a person to achieve the average return of X% over 20 years, the person need to survive financially for the next 1 to 5 years. A plan that does not account and prepares for possible short-term recession and unemployment may not survive the next recession.

KlangFool

Hiker-Biker
Posts: 134
Joined: Mon Sep 09, 2013 2:45 pm

Re: Why diversification is not a viable strategy?

Post by Hiker-Biker » Fri Mar 08, 2019 12:59 pm

[/quote]

I don't intend to own gold. If it gets to that point, you are at risk of someone, or a group of people taking your gold, food supplies, etc. No, I am not advocating being a prepper...but it could happen.

That is why I'm considering Portugal as a potential retirement location.
[/quote]

Hiker-Biker,

You need to pay your way to Portugal. How do you plan to do that without some gold?

KlangFool
[/quote]

<deleted>
Last edited by Hiker-Biker on Sat Mar 23, 2019 12:37 pm, edited 1 time in total.

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