Jul 23 2008
True Diversification
My father and I share a true passion for investing. For years both he and my husband felt that I should have changed careers and been a financial planner. So why haven’t I? I think differently than the average planner, and don’t know if I could stick to the rules that the SEC has laid in place to protect investors. I am more of a risk taker, dabbling in areas that keep some people awake at night.
Take the idea of diversification, for example. Most portfolios follow a mix of stocks and bonds that represent the correct allocation depending on your age. The average financial planner is supposed to present their client with a “safe” mixture following this recipie, and the majority of the stocks are to be big company stocks like P&G, or Coke. These suffer during a severe stock market downturn, and making up the loss of the value of that during a bear market can take years.
Here’s something else: many financial planners use stocks like Coke or McDonald’s as their small area of investment in global stocks. Their reasoning is that these companies have a presence all over the world. That’s true, but during a bear market here in the US, these companies still suffer. Foreign stocks such as Posco (PKX) are smart, well run businesses, with a very bright future and are truly a foreign stock.
True diversification involves buying silver and gold when times are good and the price is low. Yes, it involves storage fees or holes dug in your back yard, or a safe. But during times like right now, you will be grateful beyond words to have a treasure chest to back you up. Plan on having three times in your life when you will face difficult enough times that will hurt. Where are you at now in that time line? Personally, I remember the 1970’s well, though money wasn’t important to me then. If you don’t remember that time period, then think about having two more serious economic down turns in your life.
When do you sell out your metals? When you need the money, or whenever it seems like tons of people in the media are writing about it. If the people next door are getting into metals and they never even noticed gold and silver before, it’s probably time to sell. Always keep some metals behind in case of a true monetary breakdown. Consider after World War two whenever money in German wouldn’t buy food, but silver coins would. I don’t like to think of our country being that bad off, but I’ll be glad if I have something set aside in case it ever were.
Finally, real estate. I once had a wonderful and well meaning investor tell me that real estate should only be about 3% of your portfolio. I don’t know what planet he was on, but it wasn’t mine. There are many true factors to dealing with real estate. First, you have to have the desire, time, and ability to deal with real estate. Second, you have to buy right. Many people believe that now is the time to buy. To some extent, if you have cash, that may be true. However, be careful. There have been times in our nation’s history when people couldn’t afford to pay rent. Not any rent. And leaving an empty building is an insurance disaster waiting to happen. Get a bargain price and it should stay rented.
I know that responsible financial planner put bonds in portfolios. I’ll address bonds at a later writing, but suffice to say that unless the return on the bonds is going to be fantstic, I don’t use them much. I like the returns stocks can give me, and bonds always seem too slow.
There are other interesting ways of contributing to your wealth long term that no financial planner would ever discuss. Write a book, invent something that no one can live without, turn your passion into a newspaper column. Buy a cash cow business. All these build revenue and may even make your life easier as you enter your golden years. But advice like that goes beyond what any normal financial planner would discuss.
My hats off to all the financial planners who write the roadmap to their clients’ needs. I admire them. I just could never see myself as one of them.
