True Diversification

We meet a lot of people that tell us their investments are “pretty conservative,” or that they’re “diversified.” But on closer examination, they own the same things everyone else does.

Spoiler alert: if you own the same things everyone else does, by definition, your investments are anything but pretty conservative and diversified. True diversification requires the fortitude to put money into things that the herd is not buying.

What happens at big financial firms is fairly simple. Representatives advise all their clients that by buying their packages of securities, in the patterns their pie charts reflect, their money will only be in a “moderately aggressive” allocation. Putting money into anything else is a bad idea because it won’t earn as much as their pie chart, or it’s “too risky.”

I’d say this advice serves the industry’s profitability, but that’s obvious, isn’t it?

Some individual investors (like you) are starting to get wise to the fact that the industry does not have your financial interests at heart. But many investors have not begun to fully comprehend that much of what they’ve been told about the way to invest is all wrong. The conventional wisdom serves the industry, not individual investors.

Here’s the view from high up: The central banks have created an unprecedented amount of currency in the last ten years, and all of it has had to go somewhere. More has gone into the bond market than any other asset class, directly, because this has become the main lever for central banks and their quantitative easing policies.

Next on that list, behind the bond market, is the stock market. Central bank money has gone into stocks indirectly, as executives borrow money cheaply in the bond market to raise cash for share buy backs.

Real estate values have also, of course, benefited from central bank money as investors and home buyers alike borrow the money from banks to buy properties. Commodities and natural resources are really the only asset class that could arguably be out of favor at present. Though there has been a little bit of movement to the upside there since early 2016 as well.

My point here is this: central bank policies, coupled with financial services industry dogma, has made it very difficult to find places to put money that are not obscenely priced since the herd has already poured tons of money into them. True diversification in this environment can only be achieved by significant research, effort, and being in the right place at the right time, or, luck.

Most people do not want to break from the herd. It’s too scary. Most people tell themselves (consciously or otherwise) that they, or their advisor, will get them out of any investment that begins to fall out. I hope I don’t have to tell you neither of those things are really going to happen.

I just watched a Denzel Washington movie called “Unstoppable” where two railroad men unwittingly send an unmanned train down the line. It starts off at a slow speed, so they’re lackadaisical about getting on board to grab the controls. But their missteps allow it to gain enough speed so they can’t regain control and it eventually ends up speeding down the line at full steam, taking lives as it goes.

I had a manager once tell me, “There are no emergencies in this business.”  I think there are, but we lack the foresight that would establish the urgency needed to step up and gain control now.