Conventional wisdom and diversified investments should be disconnected on all accounts. The traditional asset allocation models with the colorful pie charts and graphs are no longer valid in the today’s closely wound “all the same market” environment.
There was once a time when an investment advisor would provide a model portfolio that showed a portion of money allocated to a number of asset classes like large cap value stocks, mid cap growth stocks, small cap stocks, international stocks, REIT’s, etc… At the time, those strategies made perfectly good sense, but over the last couple of decades, almost all markets have converged, they ebb and flow together.
Not many advisors recognize the convergence, and continue to show diversification to include a wide array of mutual funds or stocks and lose sight of the FACT that most of the investments go up and down together at the same time, but at different magnitudes.
Irony at its finest. An industry that coined the phrase “past performance doesn’t guarantee future results,” continues to show past performance charts as justification for potential future returns based on the story of a long term uptrend that seized to exist 10 years ago.
Living in the past is no way to either predict, forecast or manage your social or financial future. Change is a dynamic absolute. Our lives and everything in them change each and every day. On a macro scale, when considering how investments should change over time and into the future, one needs to try and consider what the future might look like, how and where our needs may change, and what a successful diversified investment portfolio means today as opposed to 20 years ago, or 10 years into the future.
During an expanding credit economy that has arguably ended with the most recent crisis and events surrounding 2008, investing in anything during the prior 25 years probably resulted in some reasonable gain, or better. We seem to be entering a contracting economy which is nothing other than a naturally changing economic cycle that will most likely clean out the excesses that were built up and re-start the next phase of prosperity. The issue will be to what degree we contract and how long it will take. (hint: We have clear thoughts on this topic and our subscribers know what they are)
Recognition of this cycle is the first step to understanding the need to change the mind set for what diversified investments look like during and after the next economic phase. This can make the difference from two extremes – participating as a victim, or an opportunist. Which one will you be?
At the expense of over simplifying the process, the first step is to think in terms of liquidity. Decide how much of your total asset base needs to be accessible on an immediate basis and segment that portion into “liquid assets.” Then determine what the monthly or annual cash flow need is and what monies come in today from various sources. (You’ll determine if those sources are viable for this model) After determining the remaining cash flow need, you will begin to train yourself to find the best and least obvious places to earn a return on your assets through current income and cash flow or expected future return. The point of this exercise is to think differently. The reason why we use the term least obvious is because today’s obscurity will be tomorrows normality. In simple terms, the astute investor who was fortunate enough to purchase income producing real property during the savings and loan (S&L) crisis was able to see into the future and realize and seize an opportunity. While real estate may be a good investment once again, we may still be far away from the “bottom” of the market that is professed at least once per month.
Our intention is to use the thought of diversification in the purest sense of the term and think about investments in an unconventional way. Entirely different than the simplistic pie chart from 1999.
The primary focus of our market forecasting service is to provide our subscribers with directional bias for the markets we cover. We also try to provide thoughtful insight into all areas of investing based on current and probable future events. Not only is it possible, but necessary to help others think differently. Even if you don’t agree or take heed in some of our forecasts or thoughts, at least you will have the benefit of perspective that is not mainstream. In the end, you’ll make the correct choices and decisions.
We do things very different than most analysts or market participants. To learn more about what we do and how we do it, watch our short six (6) minute video here, and try our forecasting service for free.
What is the best way to find out if you like something? Try it!