Diversification does it work??

[HF63]

I just took some time to look at the collateral dame in my portfolio and it appears to me that diversification does not work at all.
My investments in bonds, high yield, emerging markets they are all acting just like my Wellington fund. The best fund is my Live Strategy Income Fund which is down but nothing compare to everything else. I'll probably be changing to this balance fund, treasuries, and CD's for my none stock portion.

 

[gauss]

Someone who is more knowledgeable will likely weigh in, but my understanding is this:

I think the assumptions about diversification and AA are intended to apply over longer periods of time. At the basis of the assumption is "uncorrelated" asset classes.

When the sh*t hits the fan and everything goes down at once over a short period of time, the classes are no longer uncorrelated.

-gauss

 

[mickeyd]

I'll probably be changing to this balance fund, treasuries, and CD's for my none stock portion.

How will you know when to take this action?

 

[HF63]

How will you know when to take this action?

I got some time in my side for know but going to increase my cash or close to cash investments (CD's, money markets, and treasuries).

 

[SnowballCamper]

The difficulty in getting true diversification is partly why I stick with the TSP (Thrift Savings Pan for federal govt employees). It offers a G-fund that is Treasury securities only sold to the TSP, so there is no market risk, but a small interest return backed by the treasury. The price doesn't go down, just up, very slowly, as interest is paid. It's a little more than good CD rates without the hassle of shopping for CDs.

I did just do a comparison of Vanguard BND to S&P500 index on google finance. For the past three months BND is up 0.01% and S&P is down 30.94% so that would definitely be diversification... have to look at longer time periods than days, and index products.

 

[HF63]

--At what age does spending less now in order to have more later stop making sense?



I guess it depend in one's health, having money and no health makes it difficult to enjoy the money.


Spent some and save some but do not go crazy on either side but do try to enjoy life.

 

[SnowballCamper]

HF63, that's the first time someone responded to my signature line... I think it's the overarching question for anyone on a path to retirement. We all have to find our own answer, and these forums remind us that we're not alone.

 

[ejman]

According to Quicken, my Vanguard Index 500 fund in down 24.3% as of today's prices while my Vanguard intermediate Bond Index fund is flat for the year. Based on that I would say that in spite of all the troubles diversification does work.

 

[Which Roger]

According to Quicken, my Vanguard Index 500 fund in down 24.3% as of today's prices while my Vanguard intermediate Bond Index fund is flat for the year. Based on that I would say that in spite of all the troubles diversification does work.

+1 Same here. I understand how OP's experience differs, because those are high-risk bonds, and they can behave much differently than more conservative bonds.

 

[Markola]

According to Quicken, my Vanguard Index 500 fund in down 24.3% as of today's prices while my Vanguard intermediate Bond Index fund is flat for the year. Based on that I would say that in spite of all the troubles diversification does work.

+2. Our VG Total Bond and Total International Bond Index Funds are positive for the year to date.

 

[ncbill]

I just took some time to look at the collateral dame in my portfolio and it appears to me that diversification does not work at all.
My investments in bonds, high yield, emerging markets they are all acting just like my Wellington fund. The best fund is my Live Strategy Income Fund which is down but nothing compare to everything else. I'll probably be changing to this balance fund, treasuries, and CD's for my none stock portion.

"Owning a large number of stocks reduces risk. Less widely known is that it also increases expected returns."

https://www.advisorperspectives.com/articles/2019/12/02/the-myth-of-overdiversification

 

[Montecfo]

+1 Same here. I understand how OP's experience differs, because those are high-risk bonds, and they can behave much differently than more conservative bonds.

Agree. You can't just buy something that calls itself a bond, Bond fund, or a bond ETF. You need truly uncorrelated assets, which means high quality, highly liquid, and no leverage, no derivatives, etc. Wise to avoid ETFs which package less liquid bonds as a single highly liquid security.

It does work.

 

[audreyh1]

Notice that some things went down way, way, way more than others.

 

[foxfirev5]

My cash and CD ladder are proving to be excellent diversifiers. At this point they represent 60+ % of my portfolio. However just like a bond fund my income will decline as new issues replace higher yield maturing CDs. I will continue with CDs as long as they offer higher yield than the corresponding treasury. IMHO the only truly safe options.

 

[GravitySucks]

My bond funds are generally up. Not at all time highs but up for the year and up for the past 12 month.
The exception is the date due (bullet) corporate bond funds I used to build a ladder. IBDO is my worse performer down 7% from it high. Not planning to touch it till it matures 12/2023 though. Hope it can recover, but it's not the end of the world.

 

[Lsbcal]

I just took some time to look at the collateral dame in my portfolio and it appears to me that diversification does not work at all.
My investments in bonds, high yield, emerging markets they are all acting just like my Wellington fund. The best fund is my Live Strategy Income Fund which is down but nothing compare to everything else. I'll probably be changing to this balance fund, treasuries, and CD's for my none stock portion.

What did you expect from assets that are correlated to equities. Certainly this correlation applies to high yield and emerging markets. If by bonds you mean a mix that includes corporates then sure, in a major decline where we might head into a bad recession, they will have equity correlation as well.

To me diversification means the assets you have are not all correlated to the same positive and negative economic phenomena.

This sort of thing basically happened in 2008. Some of the assets that held up when equities tanked are doing so now too.

I'm not saying that I anticipated all this crash stuff but I learned a bit from 2008-2009 that has carried over.

 

[Sunset]

My best investment recently has been TP.
I sleep well at night.

As for the diversification, Holding BND has been a little better than plain cash. Happy to not lose money (on paper), but not terrific gains either.

Still it has done some good.

 

[OldShooter]

What did you expect from assets that are correlated to equities. Certainly this correlation applies to high yield and emerging markets. If by bonds you mean a mix that includes corporates then sure, in a major decline where we might head into a bad recession, they will have equity correlation as well. ...

Not picking on anyone in particular, but one of life's little mysteries for me is understanding people who first allocate a "safe" fixed income amount and then charge off in all directions adding risk by chasing yield. Junk, emerging markets, various financial contraptions designed to enrich their sellers, etc.

I guess it is the optimism that Mr. Darwin has bred into us. The same optimism that keeps the casinos and lotteries going.

DW and me? TIPS. IMO the most underappreciated retirement investment.

 

[Freedom56]

I don't buy equities but in general whether you buy stocks or bonds, broad diversification does not work. There are many sectors that are not suitable for investing:

1- Energy (oil and gas) should be avoided - I have been stating this for years
2- Retail - department stores/mails were overbuilt and will continue to be in decline
Costco, Walmart, Amazon, and other E-commerce platforms will dominate this space.
I would avoid this sector as margins are too low in this sector
3- Hotels were already in trouble before this pandemic with competition from AirBNB and VRBO, that won't change.
4- Restaurants - Avoid this sector don't even look at it. Eighty percent of restaurants go out of business within 2 years of opening and that's when time are good. These are businesses that live paycheck to paycheck.

5- Airlines - this sector is not for investors. Airlines live paycheck to paycheck and historically have wiped out investors.

6 - MLPs - Stay far away. These were products set up by Wall Street to scam investors into believing you would earn a great income stream and you would own part of the energy infrastructure. The reality is that even infrastructure requires maintenance and capital investments.

7 REITs - Most have been terrible investments except for perhaps rental apartments. However due to a lack of any real transparency, I would stay away.

8- Mining - Just say no to this sector

9- Industrial stocks - Low margins, high capital, high debt industries - what can be worse?

In my opinion, you should invest in companies that have strong liquidity in sectors that that have a future:

1- Technology (semi-conductors, storage, broadband, communications equipment, video, imaging). The demand will continue as long as there are humans on this planet.

2- Financials - They make their money from scamming investors - that won't change any time soon (buy these 3 months before the economy starts to recover)

3- Pharma/Biotech - This sector will continue to grow slowly. Buy the blue chip companies when they have been beaten down.

4- Healthcare - this sector will continue to grow and the focus will be on medical suppliers, imaging, and lab testing.

Real Estate/Rental properties are good investments if the location is right and you don't mind managing them. No financial adviser will tell you that as there is no incentive for them to do so. But in reality, they can create tremendous wealth.

If you don't understand the investment product you are buying, just buy CDs. CDs have outperformed many sectors in the market over the past 30 years and have kept your capital safe and compounding during market downturns.

 

[captain3d]

True diversification works. 25% each of stocks, long bonds, gold & cash.

 

[OldShooter]

... CDs have outperformed many sectors in the market over the past 30 years ...

Hmmm ... this seems unlikely to me. Do you have a link or reference to a study that would support this statement? I am reading it that you are saying that CDs have outperformed some sectors on a total return basis over 30 years. Right?

 

[Freedom56]

Hmmm ... this seems unlikely to me. Do you have a link or reference to a study that would support this statement? I am reading it that you are saying that CDs have outperformed some sectors on a total return basis over 30 years. Right?

Yes that is what I'm saying. Keep in mind 30 years ago, CD yields were much higher 30 years ago (so were treasury rates) and yield only fell off a cliff in 2009 in the era of quantitative easing. If you just rolled 5 year jumbo CDs over the past 30 years and invested the interest in 5 year CDs, you would have outperformed most equities. It's not about recovering losses after several years, it's about avoiding the losses and compounding. You would have even better returns investing in individual investment grade 5 year corporate notes and rolling those over and re-investing the interest in other corporate notes.

Here are the average CD rates that cover a 30 year period:

https://www.bankrate.com/banking/cds/historical-cd-interest-rates/

Keep in mind, that the average rate is about 1 to 1.5 points below a jumbo rate.

My investment portfolio (now over 8 figures) has shifted from; treasuries and CDs in the 1990-2009 to investment grade corporate bonds, CDs, and preferred stocks from 2009-2019 to corporate bonds and CDs.

 

[OldShooter]

Again, that seems unlikely to me and you are stating these as facts. Can you provide some evidence to support these statements?

 

[Freedom56]

Again, that seems unlikely to me and you are stating these as facts. Can you provide some evidence to support these statements?

Take a look at the XLE, it's where it was about 30 years ago and soon will be completely wiped out. The same can be said about the XLF (but won't get wiped out). The dividend payments from the XLE do not compare to CD rates. The DOW is a complete joke. Many of it's components no longer exist or are zombie stocks. The problem now is it's no longer an industrial index. Pretty soon they will have to put Amazon, Facebook, and Google to replace some of the components.

 

[Lsbcal]

Take a look at the XLE, it's where it was about 30 years ago and soon will be completely wiped out. The same can be said about the XLF (but won't get wiped out). The dividend payments from the XLE do not compare to CD rates. The DOW is a complete joke. Many of it's components no longer exist or are zombie stocks. The problem now is it's no longer an industrial index. Pretty soon they will have to put Amazon, Facebook, and Google to replace some of the components.

If I look at intermediate term investment grade (VFIDX) versus the sp500 fund (VFIAX), the sp500 easily wins. Here is the chart from 1994 to present:

I don't have a suitable chart for CD's. Do you?