So Much For Diversification!
At least, that’s my conclusion from this chart/table via the NYT’s Floyd Norris:
“Whatever else you might want to say about the virtues of international diversification, in this cycle it has done little to balance the risks of investing in any one market. When the markets went down, they nearly all went down. When the markets rose, they soared together.
If history is a guide, the strong recovery may be an indication that better prices are still ahead. Since World War II, there have been eight periods before the current market when the S.& P. 500 managed to rise at least 30 percent over a half-year period — in 1963, 1971, 1975, 1980, 1982-83, 1991, 1997 and 1999. A year later, the index had made further gains in seven of them.”
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Source:
Around the World, Stock Markets Fell and Rose, Together
FLOYD NORRIS
NYT, September 11, 2009
http://www.nytimes.com/2009/09/12/business/12charts.html
September 12th, 2009 at 2:22 pm
diversification is a good thing but….
the reason most advisors rec’ diversification is because they don’t actually have an informed opinion on any of the markets so they rec them all. Things such as this get pushed hardest at exactly the wrong times. An example could be last year or even in late 2007 for that matter, many advisors began getting louder and louder about using commodities as an asset class.
September 12th, 2009 at 3:03 pm
b22-
i wonder how much of this is related to the $ carry trade
September 12th, 2009 at 3:29 pm
Diversification is fine but when it rains everyone gets wet. The question is: were you exposed to rain?
(nod)
September 12th, 2009 at 3:29 pm
Thankfully, put options provide the better level of diversification these days. Of course, if we all did that……;)
September 12th, 2009 at 3:50 pm
Yes, put options, in the form of a collar spread represent the 21st century method for guaranteeing the value of a portfolio. It’s superior to diversification and asset allocation as a risk reducing tool, but the professional advisors run away from options.
Barry, I wonder if you’ve been using collars, or any other option strategy. I’ve been a professional options trader for since 1977 and I know the power of options to reduce risk.
http://blog.mdwoptions.com/Options_for_Rookies/
September 12th, 2009 at 4:21 pm
“If history is a guide, the strong recovery may be an indication that better prices are still ahead. Since World War II . . . ”
I suppose it’s begging the question to wonder why these discussions always carry the analysis back to just after the last historical period when debt levels were anywhere near where they are right now.
September 12th, 2009 at 5:16 pm
It would seem that for the risk-averse conservative investor, the best course was to have 100% of your assets in Chinese stocks for the past several years … at least that’s what history would apparently tell you.
September 12th, 2009 at 5:23 pm
The developing country markets are just the high beta segments of the world stock market.
September 12th, 2009 at 5:28 pm
So what’s a good way to invest in Chinese stocks, without being able to do any kind of decent financial analysis on them (the same reason I will not buy bank stocks), and receiving second-class-citizen treatment as an investor via the class A & class B stocks with foreighners only able to purchase the class B shares.
September 12th, 2009 at 6:42 pm
Seattle Chill
Yeah, I was thinking pretty much that same thing. They don’t analyze periods before WWII very much; all those inconvenient facts and comparisons, you know. (And all too often the analysis is limited to the the late ’70s on, or something like that.) And the arrogance that our economy is so much more sophisticated now than then, and our economists have figured it all out so we “can’t” have another GD. The worship of Bernanke is reaching sickening levels in the MSM lately. They’ve bought the idea that he’s got this thing whipped and “the danger has passed.”
September 12th, 2009 at 6:55 pm
onlooker-
“The worship of Bernanke is reaching sickening levels in the MSM lately. They’ve bought the idea that he’s got this thing whipped and “the danger has passed.”’
which just reinforces my growing suspicion that most everyone- especially journalism majors (what is that anyway- you can either write or you can’t)- is so oblivious to economics that they listen to whatever they are told and take it as gospel-
much akin to the Greenspan/Summers/Rubin cover in Time-
http://img.timeinc.net/time/magazine/archive/covers/1999/1101990215_400.jpg
never underestimate the stupidity of a journalist
September 12th, 2009 at 8:01 pm
OfT- what makes this “never again” attitude all the more nonsensical is that we have already blown well past some of the signposts that were put in place during the last depression. Private leverage ratios are far higher now than they were at the prior all-time peak in 1930. If you price the Dow in gold (as it essentially was in 1929, due to the gold standard) then the 2007-2009 decline fully matched the magnitude of the entire 1930s bear market. And there’s no reason to believe it’s over yet. As Nassim Taleb put it, relative to a year ago, we now have fewer people working to pay off an even larger debt load. That is not the recipe for a “priced for perfection” recovery.
Bernanke is doing exactly what he once said the Fed chair should be doing in a deflationary depression, that is, projecting the image of irresponsibility without actually doing anything dangerous. And yet no one seems to realize that it’s a deliberate act of theater. That big, scary pile of money he’s made such a dramatic show of “printing” is practically microscopic when viewed next the the yawning crater of bad debt it’s supposed to fill. Still, he’s managed to scare investors back into risk assets with the specter of looming inflation. Monetizing enough debt to decisively stop deflation in its tracks would send real interest rates spiraling to the moon, and the entire financial system would collapse overnight in a blizzard of defaults. The Fed is really far more impotent than anyone wants to admit. But if one accepts that the Fed isn’t in control, then that means no one is, and that’s the most terrifying prospect of all.
September 12th, 2009 at 9:50 pm
Regarding the Time magazine cover from 1999: How come Mr. Greenspan never buys a new pair of glasses? He’s been wearing those same specs since the Reagan years at least! They are out of fashion, their field of vision is needlessly large, they don’t look at all comfortable, and he can afford better.
Warren Buffett is another one. What good is it to be the world’s richest man if the lower rims of your glasses are constantly getting gunked up with sebum and sloughed epithelial cells? Bill Gates got religion; how come his buddy can’t?
You would think that at some point when having lunch with Henry Paulson, these guys would have complimented him on his rimless glasses and asked “Hey, where’d you get those, Hank? Can I try them on for a second?” And then maybe gaze into a soup spoon and ask “How do I look?”