Comments on: Complicated costs. Simple saves.

By: Clive

Clive — Sun, 14 Feb 2010 10:22:48 +0000

Gold was in effect IPO’d in the 1970′s, floating at a deeply discounted price level. The prolonged transition from high (double digit) interest rates in the 1970′s down to the more recent near 0% interest rates has favoured progressive stock and bond price appreciation.

Personally I’m prepared to devote a bit more effort in order to avoid relying upon the Permanent Portfolio style alone. The blend that I’ve settled for is a combination of Permanent Portfolio combined with Mebane Faber’s Quantitative model, which I anticipate being better at capturing rewards out of sideways zig-zagging markets than that of PP alone.

I’ve put up some web pages over at http://jfholdings.co.uk to record progress of that blend for anyone that might be interested.

By: craigr

craigr — Sun, 14 Feb 2010 07:06:19 +0000

Hi J,

The main problem with splitting up the stocks so much is that there are more costs involved. I’m just not sure the cost of potential diversification is worth the added complexity, expenses and potential to lag the market when the small/value strategies are out of favor.

This debate had come up before and I guess my only advice is that to stick to the lowest cost and longest established index funds you can if you want to split up the stocks. I don’t think there will be either damage or benefit done whether it is split or not. But I do think the main diversification of the portfolio comes from the stocks, bonds, cash and gold major assets and not worrying too much about splitting up the stocks. So I’d worry first about the major asset allocation split before I thought about splitting the stocks.

By: J

Sat, 13 Feb 2010 14:06:32 +0000

Not sure why diversification isn’t a good idea within the 25% stock allocation. A quick glance at what kind of results that would produce based on data back to 1973 shows that it would result in higher returns with lower volatility for the overall portfolio – that can’t be a bad thing. The only negative might be more slices to rebalance into, but the change is only from 1 to 5 so that doesn’t worry me much.

By: Jim

Jim — Sat, 13 Feb 2010 03:09:04 +0000

The diversification “myth” was put to test in 2008 and failed miserably. The more and more I read about the Harry Browne diversification of having assets for a recession, prosperity, inflation and deflation the more it makes sense to me.

By: craigr

craigr — Fri, 12 Feb 2010 21:40:25 +0000

Ned,

My looking back on many things I’ve read on this subject reveals that what many people think is diversification is really a play to grab more returns. They’ve just convinced themselves that owning a bunch of similar assets is not a veiled attempt to beat the market, but rather a prudent step to diversify.

It’s OK if people want to own a lot of different stock asset classes if they are being honest with themselves what they are really doing and using money they can afford to lose. However I find much more often than not they are living in a bit of denial about the whole subject of real risk. They will hide behind some academic or investing book to justify what they know they are actually trying to do (beat the market).

Like many, I’ve been burned myself in this regard. Experience, as they say, is an expensive teacher. You pay the tuition first, then you get the lesson.

By: Nedsferatu

Nedsferatu — Fri, 12 Feb 2010 21:29:54 +0000

I find there is plenty of complexity in any investing without adding complexity of false diversification: you have tax shelter accounts, balancing across accounts, buying in lump sums versus dollar cost averaging, keeping track of your NAV, diversifying within the allocations (for example within stocks), geographic diversification, institutional diversification, and probably more I’m forgetting.

The permanent portfolio is simple for sure but more than that it is elegant. In science the elegant/simple solution is often the most powerful and useful despite being the easiest to understand.