I’m away for a few days, so I’ll have a couple of guest posts for you today and Monday. Today’s post comes from Rachel at MomVesting. She’s got an interesting take on my What Is a Balanced Portfolio post. I enjoyed this and I hope you will too.
Our esteemed host is an advocate of balance, and honestly we are too. We believe diversification is good, but only when it’s good diversification. Let me explain. Even in the case of a well-diversified portfolio, sometimes all you’re doing is guaranteeing worse returns than you’d expect otherwise. If anything was failsafe in investing, then everyone would do it.
What is Balance?
In her post about balance, 2 cents looks at how she can claim to be balanced when she doesn’t own any stocks. There’s no inherent lack of balance in lacking a certain asset class. Looking at your own portfolio: is every asset class represented? Do you have gold? Other commodities? Corporate bonds? Commercial real estate? You get the idea, almost all of us are missing certain asset classes from our portfolio; it doesn’t mean we’re out of balance, or even that we’re not diversified.
This suggests a question however: If we’re willing to leave certain assets out of our portfolio because we don’t believe in them, why aren’t we willing to invest heavily in asset classes in which we have a high level of confidence. In other words, why do we consider it safe to lack certain asset classes, but not safe to weight our portfolio towards one asset class?
So what is our goal in heavy diversification? Are we simply trying to match inflation? If we want to do that, why don’t we simply invest in gold? Speculation and timing issues aside, gold is a great way to make sure your money is worth what it was before. If our goal is to do more than simply match inflation, why aren’t we willing to follow our conviction?
Suppose I believe that government intervention will force stocks to go up regardless of the underlying economic realities. Why shouldn’t I weight my portfolio towards those stocks? In the same way that I leave out some asset classes, shouldn’t I load up on the ones I like?
Ultimately I think most of us are trying to do more than just match inflation. How much diversification is really helping us meet that goal? If we’re trying to outperform, maybe it makes sense to seek a little more imbalance.
Hmmm … A little imbalance is OK. I like that. What do you think? – 2 Cents