Should You Really Diversify?

Many people have been told for several years that they have to diversify.  While there is a time and place for diversification, time has proven that actually doing your homework and weighting your assets towards certain areas works much better.  Diversification is a great tool for people that sell products.  It enables them to sell products with lots of commissions and fees because they can convince investors they have to own 10 mutual funds instead of 2 or 3; hence, increasing their pay.

Professors have won Nobel prizes pushing for diversification and the efficient frontier, but the last several years have proven that those types of strategies don’t work.  In fact, many investors haven’t made any money in the last 10 years using diversification.  Let’s examine 2008.  A diversified portfolio last year would have included stocks, mutual funds, real estate, bonds, commodities, etc.  All of those lost tremendous value last year, some as much as 50%.  The best investment for last year would have been cash or CDs.  A lack of diversification last year was much safer than any diversified portfolio.  This year, it’s different.  The point is every year is different and instead of blindly putting your money in several different investments, you should do your homework and weight your portfolio towards the best ones.  These decisions are dependent on several factors such as interest rates, the economy, and geo-political risks. 

When you look at your life and average out all the investments you’ve owned in the big picture, it should look diversified.  But, it should not be constantly diversified on a yearly basis the way most advisors recommend.  They will spread out your portfolio to such a degree that some investments are always up while others are down insuring you’ll have subpar returns.


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