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True Diversification

Bull or bear markets should not have a large impact on the growth of one’s money.  Yes, I am sure that statement doesn’t make a lot of sense to the average investor who has been taught to “buy and hold” for the long run.  Last year and in fact this entire decade has shown that this is not wise advice.  Furthermore, the traditional asset allocation models to provide protection and diversification have proven faulty as well.  Sadly, this could have been easily avoided because history proves that long only assets have higher correlations during bear markets.  It is well known even among the academics that correlation is one of the few things that does go up in a major market decline.  The true diversifier and the only hedge for a long is a short.  So the reason one wouldn’t care if they are in a bull or bear market is when that investor has a real diversified portfolio.  Not a falsely diversified portfolio consisting of long only choices of equities, bonds, real estate, commodities, and even private equity.  A real diversified portfolio would consist of these asset classes but both long and short.  With such a portfolio, one would no longer have to worry about a rising market or a booming economy to see strong gains.  In fact, markets tend to drop faster and harder than they rise so making money on the downside can add to the growth of one’s portfolio.

However, even with a diversified portfolio and appropriate hedge, market timing is an important element, but that will be a topic for another day as there are so many that believe market timing is to be avoided at all costs.  Again, just as the last decade disproved these commonly held beliefs regarding “buy and hold” and diversification, market timing will be vindicated as well.


April 21, 2009 Posted by | Legacy Funds | , , , | Leave a comment