Redefine Portfolio Diversification
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"Diversification is a protection against ignorance. It makes very little sense for those who know what they're doing."
~ Warren Buffet, 1996 Berkshire Annual Meeting
True words of wisdom. Diversification needs to be re-analyzed during bear markets. Stock picking is difficult for even seasoned veterans because non-diversifiable risk is always present. In bull markets, diversification, along with throwing darts at the stock section of the Wall Street Journal typically produce positive returns.
In times of utter catastrophe (see '29-'32, '73-'74, '00-'02, now) diversification yields mediocrity at best. That is due to the fundamental difference between diversifiable risk and non-diversifiable risk. Inversely, or lowly correlated sectors during bull markets become positively correlated during bear markets as non-diversifiable risk dominates. Essentially, fear driving selling reverses negative, or low correlation. So in a significant bear-market a truly diversified portfolio must employ a long/short strategy or utilize significant alternative assets (Treasuries).
Financial innovation by virtue of inverse ETFs allow investors access to short-the-market strategies.
A word from the wise. Shorting this market is like "picking up pennies in front of a bulldozer."
~ Warren Buffet
Live from the uncharacteristically balmy, and even more pleasant Queens,
Think happy thoughts
TM
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