Diversification – Smart or Dumb?



QUESTION: Mr. Armstrong; Do you believe in portfolio diversification?

ANSWER: No not really. I see no point in putting money in something you know will be a loss. Diversification within a sector is one thing. But buying government bonds when rates are at a 5,000 year low and governments are in trouble around the world, I just see as really stupid.

Once you understand how our global model works, you can see the trend unfolding in a numerous instruments that therefore confirms the trading direction. For example, we warned that gold had made an important high and would crash from 2011 for at least 3 years minimum. At the same time, we warned that the Dow would breakout to new highs. Barrons reported that forecast and did not believe that we would be correct. Both the high in gold and the breakout in the Dow were connected. Each confirmed the other among a host of other relationships.

What is impossible is trying to forecast just gold or the Dow in isolation relying upon fundamentals, which always prove to be worthless. Take the Long-Term Capital Management Crisis of 1998. The problem began in Russia and investments there collapsed but you could not get out at any price. They began selling assets everywhere else in the USA to Japan. This became a liquidity crisis that spread into a contagion. You could look at all of the fundamentals that said nothing should be happening in Japan. That led to massive losses in Japan that were contrary to fundamental analysis.

Everything is interconnected. Diversification is for people who cannot forecast so they just hope to stay ahead of the game. Asset Allocation has to be done smartly. You need some cash and those who will want some bonds v equities simply need to stay short-term and away from issues that will be a problem.