Portfolio Diversification Is A Scam!
Gerald L. House MSM
“The Contrarian Investor”
July 29 2016
How many times are we going to hear the statement that investing in a diversified bundle of mutual funds and bonds can grow and protect your investments long term? The reality is that this philosophy only protects the brokerage firm’s business—not yours. They actually do want you to make a little money—just enough for them to keep your accounts. Sometimes, they even select investments that perform very well. But, most of the time, their track record is abysmal. (A Dalbar study in 2015 found that the 30 year return for the average stock mutual fund was only 3.66 percent) Let’s face it, the brokerage houses are tasked with selling investments—good ones and bad ones. So, who do you think they must sell these bad investments to? That’s right; they unload them on us in a bundle of mutual fund investments socked away in your 401K and IRA’s. After all, you gave them carte blanche permission to manage your mutual funds as they see fit. The brokerage houses are happy as a “bug in a rug” selling investments (Good & Bad) and collecting the fees associated with managing these funds.
Smarter than a 5th Grader?
I remember playing Little League baseball when I was 10 years old and getting on a hitting streak that seemed to never end. I had truly found a “lucky bat” and used it for the rest of the season. Do you think I could be convinced to use another bat after all the success I was having with my lucky one? Never in a million years!
If you find something that works—why would you want to change it? Diversification is telling you to change bats often with no apparent reason for doing so. Investing should be the same process of finding a good bat and sticking to it. It should also be something you truly understand and not an investment which requires extensive education and experience.
Warren Buffett has a simple process: find businesses which are easy to understand, selling at a discount to their value, and offers a margin of safety. Simple-but it works! He does not go into some dissertation about how he diversifies his investments. He sticks to what he knows and continues to work his system ignoring all those pundits on Wall Street telling everyone else to use different bats. Last time I checked, Warren Buffett is worth over 64 billion dollars. I think he has a good bat?
If you want to retire comfortably, you need to be in the stock market? REALLY!
Please understand who is giving you this advice—are they stock brokers or security only advisors? Don’t get me wrong, some people find investing in the stock market their best option. But, take the time to invest in good companies and don’t waste your time and money investing in mutual funds which you have no control over what they invest in. After all, the stock market is just a place to sell pieces of companies. Learn about these companies and invest in them individually because they are good investments, not some “hot stock tip” from a broker or friend.
You may also find that investing in real estate is more your style. Heck—everyone needs a place to live! If so, spend your money investing in good real estate properties which appreciate in value and produce excellent cash flow opportunities. Besides, real estate is backed by a hard asset not just a piece of paper like a stock certificate. Is real estate more illiquid? Yes, it does take longer to sell. But there is a market to buy and sell—just like the stock market. It is called professional realtors and their multiple listing services.
What about individual business ownership? A small business is an investment. You can buy or start a business part-time which may one day lead to a great investment that has real value, produces cash flow, and can one day sell at a premium. This kind of investment takes more time but may also lead to a passion you can fulfill. Perhaps this is a way to move into phase 2 of your life mission?
What is a good return on my investments?
I am often asked this question and my response is always the same—double digits, this means 10% or more. You should set a goal for yourself like: I will only invest money if the investments returns are capable of returning 12% or higher. This is a good goal but don’t forget—work on building cash flow and a lifestyle not some imaginary net worth sometime in the future for a fantasy retirement which does not exist. (See my earlier blogs)
And, don’t confuse investing with savings. Investing involves an element of risk—savings does not. That is why the returns on investing should be higher to compensate for the risk involved. Whole life insurance, Universal Life Insurance, Annuities, Bonds, Certificates of Deposit and Money Market Funds are all savings vehicles not investment products.
At this point you should look at diversification as an enemy eroding your investment returns. A much better philosophy is to find something you enjoy and have an aptitude for and then stick with it. Treat your investments as a business and you will begin to become more proficient at growing your money.
“If you are not at the table, you are on the menu”
Michael Enzi
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