It's about this diversification thing

[redduck]

I'm not sure diversification is working all that well for me. I did what was suggested and bought small, medium, large; value and growth; foreign and domestic funds and ETF's. Now it seems everything I own is in a race to reach the bottom--and it's really an exciting race, because all the participants are so closely bunched as they hurtle towards oblivion (or someplace close to it). Maybe diversification works well in good times, but is it an effective method to use in bad times?

OK, for this post I'm differentiating diversification (small, large, value, foreign, etc.) from AA (cash/bonds/equities/real estate, etc.).

[freebird5825]

same here.

wall st makes me think about black holes, but wormhole actually fits better these days. see Wormhole - Wikipedia, the free encyclopedia

i'm still sticking with diversification. there are no trump cards out there.

[redduck]

Quote:

Originally Posted by freebird5825 same here. wall st makes me think about black holes, but wormhole actually fits better these days. see Wormhole - Wikipedia, the free encyclopedia i'm still sticking with diversification. there are no trump cards out there.

Ah, this black hole thing is going to arouse HAHA's interest. Just wait and see.

[CuppaJoe]

Quote:

Originally Posted by redduck Ah, this black hole thing is going to arouse HAHA's interest. Just wait and see.

I assume you mean oil wells? I've got a story for Ha that I'll PM him if he shows up on this thread.

[freebird5825]

Quote:

Originally Posted by CuppaJoe I assume you mean oil wells? I've got a story for Ha that I'll PM him if he shows up on this thread.

uhn uh...no secrets...gotta share.

[tightasadrum]

IF not diversified AA, then what? Maybe MM, CD's, T-bills or cash-in-the-mattress accounts? Every long investment I've got has taken a dive except MM & CD's. My one shining star is rental property, and even that has probably dropped in equity value. But just like the stock funds, I don't intend to sell them or the real estate. So we'll see what happens.

[tiuxiu]

Yup I think most are down across the board. Our only asset class that's fine is the pretend bond portion that's the balance of the wife's balance in state retirement plan.

[Animorph]

I did get a chance to rebalance between equity categories here and there on the way up and down, so I've seen a little benefit. Only having cash makes this tolerable, and I'm on my last dregs of cash now.

[ziggy29]

In 2000-2002, diversifying between equity asset classes worked like a champ. This time it's irrelevant -- everything stinks like a huge pile of rotten fish.

[freebird5825]

Quote:

Originally Posted by ziggy29 In 2000-2002, diversifying between equity asset classes worked like a champ. This time it's irrelevant -- everything stinks like a huge pile of rotten fish.

you gotta visit this site, folks.
Surströmming - fermented Baltic herring
i did a search to see if i could find a good image, but this is SO much better. Read items 3, 5 , and 6 carefully.

[harley]

Quote:

Originally Posted by freebird5825 you gotta visit this site, folks. Surströmming - fermented Baltic herring i did a search to see if i could find a good image, but this is SO much better. Read items 3, 5 , and 6 carefully.

I especially like the fact that AA people can substitute cow's milk for the beer, but they still have to drink the aquavit. Anyway, I'd be willing to give it a try.

I've had Nieuwe Herring (raw green herring) in the Netherlands, and it was surprisingly tasty. Of course after spending a few hours in the coffee shops you get pretty hungry, so maybe that was part of it.

[. . . Yrs to Go]

Quote:

Originally Posted by redduck I'm not sure diversification is working all that well for me.

It's not just you. Every risky asset on the planet has gotten destroyed. Correlations for everything are approaching 1 . . . so diversification isn't helping as much as you'd like.

However, your diversification has likely prevented the drubbing you would have taken had you held just a handful of high dividend paying bank stocks or REITs. I'd also assume you have some mix of cash and bonds in your portfolio. They likely prevented you from taking the full brunt of the worldwide equity downturn. That bond index you might own saw its 30 year treasuries rally today by the most EVER.

So my guess is that diversification is working significantly in your favor, only it doesn't feel that way because your portfolio (along with everyone else's) is still down a lot.

[. . . Yrs to Go]

As a somewhat tangential point . . . the very high correlation among risky asset classes is a symptom of systemic deleveraging. Assets are being sold indiscriminately. It is not a healthy, or even rational, market. Currently investors are either unwilling, or unable, to arbitrage away market inefficiencies . . . there is no relative valuation trading going on, virtually at all.

What a great time to be a buyer of risky assets. Every baby is lying next to the tub in a puddle of bath water. It seems to me that a portfolio rebalancing that sells very expensive risk free assets and buys very inexpensive risky assets (whether corporate bonds, preferreds, equities, etc) will be a winning trade in the long run.

[freebird5825]

just for fun, i revisited some older portfolios i never deleted at M* portfolio tracker.
i found a 2004 vintage real portfolio i owned. so i compared it to my current real one.

you all can tell me what the data sez, in a ferocious bear like this.

2004
AA approx 75/25 (unsure) target, currently migrated to 68/32
agressive risk rating
core
medium diversification
2 index funds, remaining actively managed, several balanced
YTD loss -38%
average exp ratio 0.59

2008
AA 50/50 target, currently migrated to 44/56
moderate risk rating
large value
high diversification
all index funds, except 3 actively managed
YTD loss -24%
average exp ratio 0.22

[Ronstar]

Quote:

Originally Posted by redduck I'm not sure diversification is working all that well for me.

Lets see:

I have a diversified 401k and IRA portfolio of stock and bonds down about 40%
I have rental properties down about 40%
And I have part of a business down about 50%

So diversification is working well for me too - all assets are down significantly- and about the same pct. Maybe diversification isn't the answer in bad times. It's kind of tough to put everything to cash when its only getting about 3%.

[W2R]

Quote:

Originally Posted by redduck I'm not sure diversification is working all that well for me. I did what was suggested and bought small, medium, large; value and growth; foreign and domestic funds and ETF's. Now it seems everything I own is in a race to reach the bottom--and it's really an exciting race, because all the participants are so closely bunched as they hurtle towards oblivion (or someplace close to it). Maybe diversification works well in good times, but is it an effective method to use in bad times? OK, for this post I'm differentiating diversification (small, large, value, foreign, etc.) from AA (cash/bonds/equities/real estate, etc.).

I decided to re-read Ferri's All About Asset Allocation on the plane while traveling last weekend. Many sections that I scarcely noticed previously took on deeper meaning due to recent market events. I underlined a passage on p. 50, where Ferri says:

Quote:

There will be periods of time when even the most diversified portfolios will lose money. When these periods occur, there is nothing an investor can do short of abandoning the entire investment plan, which is not a good idea.

He's right. The very best investment plan can have problems at times. There are no guarantees.

[redduck]

[quote=Want2retire;750809]I decided to re-read Ferri's All About Asset Allocation on the plane while traveling last weekend. Many sections that I scarcely noticed previously took on deeper meaning due to recent market events. I underlined a passage on p. 50, where Ferri says:

Quote:

"There will be periods of time when even the most diversified portfolios will lose money. When these periods occur, there is nothing an investor can do short of abandoning the entire investment plan, which is not a good idea." (end quote).

Well, I understand that even the most diversified portfolios can and will lose money. Not only do I understand it, but I'm seeing it happen, up close and very personal. But, I wonder what it means or indicates when a diversified portfolio really get clobbered (that's a word I don't often use--sounds so 4th grade. And, just when does it make sense for an investor to abandon a plan? The answer can't be "never." Can it?

Anyhow, if it comes to reckless abandonment, the last fund I'd ever let go of would be pssst, Wellesley--not to be confused with "psst, Wellesley."