Fulkerson Capital Management
A 5-Star Rated Wealth Manager

Diversification is Not Enough

I often hear things from new clients like: "My previous advisor had me well diversified, but my portfolio still lost 40%." Lets take a look at why this happened to so many investors.


Modern Portfolio Theory
(diversification and asset allocation or "buy and hold" investing) was introduced in 1952 by Harry Markowitz. The fundamental concept behind this “theory” - note it is a theory and not a fact - is that the assets in an investment portfolio should not be selected individually based on their own merits but to consider how each asset changes in price relative to how every other asset in the portfolio changes. With the hope that different assets are uncorrelated with one another so if something goes down, something else in the portfolio will go up and prevent large losses.

The fundamental problem with this investment theory is, during a crash, everything is correlated as investors flee all risk for the safety of cash and gov’t bonds. MPT does not account for Black Swan Events (see page on Black Swans) because they are considered “extreme outliers”. This is precisely the wrong way to deal with them. We must plan for these events and have a strategy to protect ourselves from huge losses because these events play a much larger role in determining our investment success or failure than regular occurrences in the world.  

Diversification by stock size and asset class has been exposed. When there is an unexpected major world event, like the 2000 technology bubble or the 2008 U.S. housing market crash, diversification is of little help. 

We see some major stock market headwinds facing investors in the future. We commissioned a report on "The 5 Dangerous Trends Facing Investors in the Next 10 Years and How to Avoid Themin an attempt to educate investors so they are prepared for the next stock market crash. Contact us today for a free executive summary.



248-670-9823         dave@davefulkerson.net

398 Wynstone Circle South, Oakland, MI 48363  

 

Web Hosting Companies