DIVERSIFICATION

This page is an effort in progress . . .

“The belief that diversification into alternative assets could prevent investors losing money in bear markets has proved false.” Economist, December 6 2008. TC: Notice the date…after the Fall of 2008 'excitement'.

  • “Our policy is to concentrate holdings. We try to avoid buying a little of this and of that when we are only lukewarm about the business or its price. When we are convinced as to the attractiveness, we believe in buying worthwhile amounts.” Warren Buffett, Letter to Shareholders, 1978

Think for a jiff: will owning bonds stop your stock prices from falling? I do not own bonds. Dividend paying common stocks, purchased at attractive prices, have provided the best returns. That's what our portfolios consist of.

  • Asset Allocation really began in the 1950s after Harry Markowitz's paper in the 1952 Journal of Finance: “Portfolio Selection”. Before then, investors valued dividend stocks. I allocate all our paper assets to dividend growing common stock…the way it used to be done. Read the old books to discern how it used to be done: Security Analysis by Graham and Dodd, 1934; The Theory of Investment Value, by John Burr Williams, 1938; The Battle for Investment Survival by Gerald M Loeb, 1935; The Evaluation of Common Stocks by Arnold Bernhard, 1959; Common Stocks and Uncommon Profits by Philip Fisher, 1958.

Foreign Stocks: Think again for a jiff: will owning foreign stocks keep your Canadian stocks prices from falling? No. I do not own foreign stocks either. Why are global equity funds pushed? The hope is, that when the next crunch comes, foreign stocks will not fall as much as Canadian equities. ”[G]lobal diversification did not protect investors from the last market meltdown” (Rob Carrick, Report on Business, September 4 2010). For dividend growth investors, it's not the price of the stocks that matters as much, it's the income they provide. Why would you buy a global fund to protect you from a price drop when it most likely will not work? And funds are not noted for proving much income. Besides, foreign dividends are fully taxed: there's no dividend tax credit. ♣ It is safer, I would argue, to buy Canadian dividend growing common stock and diversify among them. From January 1995 to July 31 2009, the annualized return on TSX 60 dividend growers was over 12 per cent (11.2% for the non-financials, 13.9% for the financials: Connolly Report August 2009)). If you think you do better than that by selecting a global fund, especially after their higher fees, go right ahead. With global investing, would you hedge against the currency risk? The commodity-backed Canadian dollar is strong. Why would you buy American stocks? They have had a lost investment decade and are on their way to another one. I was astounded by the amount of foreign content 'advisors' recommended for people in Rob Carrick's September 4 2010 column…well over forty percent, in many cases. If most of your income is Canadian dividends, you can earn close to $50,000 a year and pay no income tax. Why would you want to pay tax on foreign income or on foreign gains that may not protect you for a meltdown that you do not need protection from because you invest for income? The word foolishness comes to my mind.

  • Emerging market mutual funds averaged 5.7% annually for the ten years to August 31 2010. Is that all that much better? Is it really worth the extra risk?
  • Asset Allocation - “In recent years there have been a lot of inflated claims made about the benefits of asset allocation. During the last bear market investors discovered just how inflated. Asset allocation, (really just a fancy name for diversification) isn't a panacea.” This June 28 2010, two page Forbes' column 'Asset Allocation Myths', then went on to explain ✔ that asset allocation will not protect you in a bear market, ✔ that there is no optimal asset allocation, ✔ that constant rebalancing is not needed, ✔ that more funds do not necessarily increase diversification and ✔ that “tactical allocation is the biggest con game on Wall Street.”
  • If you are determined to asset allocate anyway (no 's'), “Change your allocations only in response to significant shifts in value…never on 'hot' news.” Fortune December 2009
diversification.txt · Last modified: 2012/04/26 09:42 by tom
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