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Thread: Are you financially diversified?

  1. #1

    Are you financially diversified?

    "There are many studies & books that suggest you should dramatically underweight foreign stocks in your portfolio by allocating as little as 0-20%. Here is a story you might want to consider before following such advice:

    Imagine you are a Japanese investor in 1988. You are living in the most economically robust country in the world that is overtaking other countries in virtually every important industry. The economic models in other countries are clearly bunk. The US is faced with an endemic short-term mentality and a society collapsing into anarchy with gun violence and crime. Europe is in its usual sclerosis. China is an communist backwater that has barely developed since the end of World War II.

    In 1988, the Japanese stock market was 40% of world capitalization. So by any stretch of the imagination, you would want to allocate at least 40% of your portfolio to Japanese stocks. Based on data mining of historical "efficient frontiers," there would be very little reason to invest in foreign stocks. Maybe 20% for a bit of diversification if you are on the adventurous side. 0% would be entirely sensible.

    Needless to say, your decision would have been an unmitigated disaster. The Japanese stock market has performed so poorly that, in the 35 years from 1970 to 2005, there was virtually zero real growth. From 1988-2006, your stock portfolio would have been roughly cut in half. Meanwhile, the rest of the world has performed quite well.

    Now, suppose you got fed up with Japan and moved to the US. It is now 2000. You are living in the most economically robust country in the world that is overtaking other countries in virtually every important industry. The economic models in other countries are clearly bunk. Japan & Europe are in their usual sclerosis. Developing countries may be growing rapidly, but they are corrupt and their capital markets are still underdeveloped.

    In 2000, the US stock market is a whopping 55% of world capitalization. Take that, Japan! So by any stretch of the imagination, you want to allocate at least 55% of your portfolio to US stocks. Based on data mining of historical "efficient frontiers," there isn't much reason to invest in foreign stocks. Maybe 20% for a bit of diversification if you are on the adventurous side. 0% would be entirely sensible.

    By 2006, US market cap has declined to 45%, and you are wondering if you've made the same horrendous mistake once again. You wonder what you'll do if your stock portfolio once again halves in value by 2018. Hey, maybe by then, China will be 40% of world capitalization! Third time's a charm, right?"



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    I didn't write this but it's extremely useful.

    [url]http://socialize.morningstar.com/NewSocialize/Asp/FullConv.asp?forumId=F100000015&convId=188247[/url]

  2. #2
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    Marc Faber writes a lot about the myth of the successes of a buy and hold strategy. I'd recommend for you to check out some of his writings. Very similar to this. In fact, I wouldn't be surprised if it was.

  3. #3
    [QUOTE=Lawyers, Guns and Money]Marc Faber writes a lot about the myth of the successes of a buy and hold strategy. I'd recommend for you to check out some of his writings. Very similar to this. In fact, I wouldn't be surprised if it was.[/QUOTE]

    Not sure what the myth would be. There are many roads to Dublin.

  4. #4
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    [QUOTE=BrooklynBound]Not sure what the myth would be. There are many roads to Dublin.[/QUOTE]


    Most companies in the long run fail: trends, fashion change, products become obsolete, etc. Even a lot of the most successful of different eras. Just 20 years ago, AT&T was one of the biggest companies in America...now???? Look at the fall of GM and Ford lately??? Buy and hold strategy in those companies would be disastrous. This is present thought history, weather the East India Team Company, or US Railroad stocks of the 1800's or countless others that I could provide examples of it I could provide if I was willing to do the research right now.


    Read Faber's thoughts about it, he is a lot more eloquent than I.

  5. #5
    [QUOTE=Lawyers, Guns and Money]Most companies in the long run fail: trends, fashion change, products become obsolete, etc. Even a lot of the most successful of different eras. Just 20 years ago, AT&T was one of the biggest companies in America...now???? Look at the fall of GM and Ford lately??? Buy and hold strategy in those companies would be disastrous. This is present thought history, weather the East India Team Company, or US Railroad stocks of the 1800's or countless others that I could provide examples of it I could provide if I was willing to do the research right now.


    Read Faber's thoughts about it, he is a lot more eloquent than I.[/QUOTE]

    I don't buy and hold stocks. I don't want to spend the time researching them and I don't think I'd be very good at it, either. I'm sure if you do your due diligence and are bright enough you will do well by actively managing your portfolio. I prefer to buy and hold diversified (domestic/foreign, large cap/small cap, REIT, commodities, etc.) index funds.

  6. #6
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    [QUOTE=BrooklynBound]I don't buy and hold stocks. I don't want to spend the time researching them and I don't think I'd be very good at it, either. I'm sure if you do your due diligence and are bright enough you will do well by actively managing your portfolio. I prefer to buy and hold diversified (domestic/foreign, large cap/small cap, REIT, commodities, etc.) index funds.[/QUOTE]


    Just illustrating a point. Kind of tangential to the point of the article.

  7. #7
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    [QUOTE=Lawyers, Guns and Money]Most companies in the long run fail: trends, fashion change, products become obsolete, etc. Even a lot of the most successful of different eras. Just 20 years ago, AT&T was one of the biggest companies in America...now???? Look at the fall of GM and Ford lately??? Buy and hold strategy in those companies would be disastrous. This is present thought history, weather the East India Team Company, or US Railroad stocks of the 1800's or countless others that I could provide examples of it I could provide if I was willing to do the research right now.


    Read Faber's thoughts about it, he is a lot more eloquent than I.[/QUOTE]

    Be careful LG&M.........

    The buy & hold strategy for AT&T 20 years ago wouldn't only yield (T) equity today...You'd have to take into account Lucent, SBC, Bellsouth, NCR and several other entities that have existed in some form since.

    Same holds true for GM (Hughes, Directv, etc)........

    Buy & hold generally reigns true. We just can't forget that "Add" and "Sell" are timing factors that should be properly executed.
    Last edited by TerryBadway; 11-29-2006 at 07:51 AM.

  8. #8
    [QUOTE=Lawyers, Guns and Money]Marc Faber writes a lot about the myth of the successes of a buy and hold strategy. I'd recommend for you to check out some of his writings. Very similar to this. In fact, I wouldn't be surprised if it was.[/QUOTE]

    You can knock a buy and hold strategy but the reality is most buy and hold investors are in fact buy, buy, diversify, diversify investors. It's called accumulating a diverse portfolio over time.

    The problem with people who are against buy and hold, it ultimately relies on market timing. If you look at both bull and bear markets what you really see is the vast majority of stock owners who trade buy high and sell low. Since over time the market has consistently gone up, being in the market is more important than trying to time it.

    For every handful of stories of people who get out at the top, there are many more getting out near the bottom and buying near the top.
    Last edited by Winstonbiggs; 11-29-2006 at 06:04 AM.

  9. #9
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    [QUOTE=TerryBadway]Be careful LG&M.........

    The buy & hold strategy for AT&T 20 years ago wouldn't only yield (T) equity today...You'd have to take into account Lucent, SBC, Bellsouth, NCR and several other entities that have existed in some form since.

    Same holds true for GM (Hughes, Directv, etc)........

    Buy & hold generally reigns true. We just can't forget that "Add" and "Sell" are timing factors that should be properly executed.[/QUOTE]


    True, and I also ignorned dividends. I just tried to pick 3 of the "greater" companies of 20 years ago to show how a pure "buy and hold" can go bad. A lot of people aren't aware of that.

    I am not trying to get people not to invest and I understand the benefits of diversification. Just trying to make a point

  10. #10
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    [QUOTE=Winstonbiggs]You can knock a buy and hold strategy but the reality is most buy and hold investors are in fact buy, buy, diversify, diversify investors. It's called accumulating a diverse portfolio over time.

    The problem with people who are against buy and hold, it ultimately relies on market timing. If you look at both bull and bear markets what you really see is the vast majority of stock owners who trade buy high and sell low. Since over time the market has consistently gone up, being in the market is more important than trying to time it.

    For every handful of stories of people who get out at the top, there are many more getting out near the bottom and buying near the top.[/QUOTE]


    no argument

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