Diversification of Investment Portfolio

BNPP discussed portfolio diversification in the current market,

“With high correlations across traditional asset classes and geopolitical and economic risks steepening, navigating market turbulence and protecting your portfolio from downside threats requires innovation and a careful approach.

Correlations between asset classes are at an all-time high, and look likely to remain so for some time yet. I believe one key reason for this is that until recently, financial markets were still riding the highs coming off the recovery from the global financial crisis and we have seen significant changes in return, risk and correlation profiles across asset classes.

A far more effective way of applying the put strategy is to use the volatility index (VIX) to provide a better alert on market turbulence. This can act as a trigger so that when volatility rises to a pre-determined level, our put strategy can kick in and deliver the required protection.” Read more…

We live in very volatile times. If you ask me if the S&P market will be higher in one year’s time, I simply do not know the answer to that question. I have concerns about Gold in the sense that governments could start seizing it so in that regard is Gold a good investment?. Personally I think we don’t operate in free markets when you see the intervention governments are doing at the moment.

One of the dangers of government intervention is that there are always unintended consequences. Always things happen that at the outset that was not perceived. Whether it’s hyper inflation in a different country or mass crime, there are always unattended consequences when you mess with the money supply. What could happen to the s&p is that it could be very volatile. It may be a higher for a while and then lower, it will be hard to predict. We should be in a secular bear market but government interventions is making everything so volatile. When you print money, there are only the few that benefit. The middle class the lower class usually hurt the most as they get hit in the pocket.

The reason why diversification is so important especially at the moment in the investing world is because no asset class is 100% safe. Look at the M.F global disaster. Over 30,000 segregated accounts were wiped out. Gerald Celeste, a popular trends forecaster lost a multiple six figure sum in this disaster. This has been the eight biggest bankruptcy in American history. This is huge and don’t think for a second that your money wherever you have it is safe. Governments can call a bank holiday, banks or brokerages can go bust, anything can happen. This is why having a good portion of your money in hard assets at the moment is a good play. Hard assets always hold their value. Buying some real estate now in a country that experienced a big bust could be a prudent play. Rent it out so the rent more than covers the mortgage. A hard asset such as this would be very hard to take away from you.

There are economists saying that real estate wont return for 20 years so again diversification is important. Your investment plan should be some funds in cash, some in property/real-estate, some in gold and silver and some in stocks. Stocks for example right now is some parts of the world are not that expensive. Also in a money printing environment, stocks usually go up as currencies are worth less.

Above all, diversify. I do think after the MF global disaster that holding cash in a bank account or stocks in a brokerage account is risky. Protect your assets so keep them out of harm’s way.