Why traditional Diversification is Not Diversified

Lynching Facts - Why traditional Diversification is Not Diversified

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Diversification has taken on many meanings within the past few decades depending on who you talk to, and in my opinion, I think on the way we lost its true meaning. I believe the presume for losing the real meaning of the word is due to the financial services commerce bending and flexing it to their benefit. Putting the interrogate of diversification to man within the primary financial services sector, is like request man in the oil firm what is the best source of energy? It would be a safe bet that both answers would be skewed in favor of what they could sell you. So, what certainly is diversification? The definition, according to Webster's dictionary is, "To make diverse: give collection to."

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So, to translate Webster's definition to real world purposes, let's inspect some opinions on what supposedly qualifies as diversification? The large brokerage houses like Fidelity, Schwab, J.P. Morgan, and most others all pretty much say the same thing, "A basket of stocks that cover many sectors in a weighted fashion." Well, I think we have all heard that before and it sounds like good advice if stocks were the only thing we were able to spend in. Fidelity outlines this advent on their website by stating one of the simplest, most base philosophies used in the primary venture world when speaking about diversification, "By spreading your money out over separate kinds of investments - stocks, bonds, mutual funds, and cash - you generally sacrifice risk without sacrificing possible returns." Though I think we can all agree that the aforementioned is true, I think we can also agree that the stock store and bond store tend to counter move each other thus affecting each other. Also, think that Fidelity only talks about what they can sell you, i.e. Stocks, bonds, mutual funds, and money store cash accounts(what I like to call "The primary Four"). Merrill Lynch's website states a similar religious doctrine and their version of diversification is whether small cap or large cap, value or growth, and domestic or international. That still refers to publicly traded financial markets, and again only offers products that they can sell you.

Most of the citizen reading this know that the stock store or the financial markets as a whole are basically a place where associates in the world can gift and solicit themselves publicly. But one must think that, due to globalization and developed communication, all the exchanges in the world seem to control as a single store place that have way to the same media and have the ability to affect each other. If you had a basket of stocks that you plan was diversified because it was face many industries, and because it traded on one or more of these global stock markets operating as part of the larger single market, isn't there a basic diversification qoute with this? What I see is only one marketplace; hence, it is not diversified and a glaring example of this is the current prestige and subprime crisis. Ask yourself if you would spend all of your money in say, only the Nasdaq? If you answered no, then your base sense is telling you that a single store is not diversified enough, and not safe enough. Straight through reaction and counter reaction, all of these global markets are enchanting and functioning like a single global store and your own base sense will tell you whether or not it is safe enough for all your venture dollars.

At this point I have every broker, advisor, and trader up in arms and ready to call in the firing squad, but before we do that, let's dig a slight deeper. Ask yourself how many times the "basket of stocks" made it Straight through a revision untouched? Ask yourself how your folder fared during the dot.com bust in the early part of this century? Ask yourself how it performed during the slight revision back in July of 2007 or the first few months of 2008?

Now that I have used up all my shock value, let's get practical. Stocks, bonds, and mutual funds are all very important venture vehicles, but they are only three that are represented by the "single market." Now here is something that most financial advisors probably won't ever talk to you about. There Are Other Ways To spend Your Money. There are citizen out there that are making great returns in ways that are not directly connected to the single "financial" market. So let's take a look at a few alternative investments that are not represented by the "single market" by using some examples below:

Raw Land - Medium Return-High Risk-Not Passive

Income property -Medium Return-Medium Risk-Not Passive

Lending-Medium Return-Medium Risk-Not Passive

Rare Coins-Low Return-Low Risk-Not Passive

Antiques-Low Return-Low Risk-Somewhat Passive

Car Washes-Medium Return-Medium Risk-Not Passive

Coin Laundry-Medium Return-Medium Risk-Not Passive

Art - High Risk-High Return-Somewhat Passive

As we can see, there are by all means; of course some alternative investments available that are not offered by your typical financial advisor, but there is a presume most citizen would not spend in these alternative investments; they are not for the new nor are they passive investments like stocks, bonds, or mutual funds. I am not using the Irs definition of passive, because in their eyes passive means you buy a rental property and you get to go to the bank and cash checks every month without any work, though this is rarely the reality. I am any way using passive in the sense that after an personel purchases the investment, there isn't added work or time that goes into it except for collecting a return. This is sometimes called an "armchair investment." With this in mind, all of the above investments certainly don't qualify. Let's face facts, it would be great to diversify into these alternative investments, but who has time to do the years of research it takes to be a numismatics expert and successfully trade rare coins at a profit, or conduct and staff a car wash every day. One could argue that if you hired a property manger for your rental property, it would make it passive; any way I can tell you from my own perceive that you still have to conduct your manager.

So, what if the aforementioned alternative investments were offered as a underground fund with the expertise needed to return duplicate digit returns while the investor did nothing but derive a check every quarter? Would that be a diversification from stocks, bonds and mutual funds? My unsolicited riposte to that is yes, and in the attempt to offer up an alternative, it is what helped give birth to hedge funds and underground equity funds with the former's strategy mostly using the financial markets and the latter contribution more underground alternative investments.

Most of us know about Reit's that allow us to have the benefit of property ownership without being involved in the administration aspect. However, I can roughly certify that 95% of the investors out there didn't know that there are managed funds for alternatives like rare coins, art, lending, medical technology, etc that was packaged into an armchair investment. The best part is that these underground funds can often be a true diversification for an investor's folder and also be an armchair investment. Remember, investing in a underground alternative venture not only gives diversification from primary venture vehicles but it also gives another important diversification factor; many of these funds are not traded on a social exchange.

This is crucial as it helps shelter the venture from the day to day fluctuations of the financial markets. another important characteristic found in many of these investments is that they are backed by real tangible assets. This goes back to an age old seminar of what the real value of paper is in comparison to something tangible like real property. There may also be internal diversification within many of these alternative venture funds, which adds another possible layer of security (As a managing partner of Regent Global Funds, we have always believed that diversification within the fund itself to be famous to our strategy). All together, this gives the investor diversification from primary investments, primary markets, and from the investments themselves in the portfolio. They are basically structured as a underground mutual fund based on an alternative venture strategy.

The next time you hear man advising or talking about diversification, ask them, " What is your definition of diversification?" If they hit you with the "Traditional Four", make sure you tell them about the single market. You may find yourself on a soap box lecturing to primary citizen about alternative ideas.

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