International Diversification is the only real diversification!
I am honestly worried, saddened, and a little exasperated by the mainstream view of diversification. This is one of those topics that is deceptive in that, because of the simplicity of the concept, people rarely take the time to truly understand it.
Being overconfident in your own knowledge is dangerous in any case and this is no different, there are dire consequences to having all of your eggs in one basket.
Yes, I am taking the stance that not only do most people not fully understand diversification, but that most are not really diversified at all!
4 Ways You May Be Failing To Really Diversify
Say you’ve done pretty well for yourself.
You own your own home. In fact you own 2 (one to live in and one for the rental income). You’ve been a diligent saver and are sitting on a considerable “nest egg” in a savings account at your local bank.
Your portfolio is well balanced with broad allocations across several indexes as well as some carefully picked funds and select individual stocks that provide some dividend income.
Your broker has assured you that you are properly diversified, thus limiting your downside risk while still being exposed to upswings in the market.
“Diversification [as we know it] is something that stock brokers came up with to protect themselves, so they wouldn’t get sued [for making bad investment choices for clients].” –Famous (and very successful) contrarian investor Jim Rogers
With a strong savings account, physical assets, passive income streams, and broadly allocated stock portfolio how could anyone argue that you are not truly diversified?
This is how:
- You are NOT diversified if all of your investments and assets are tied to a single currency. It really doesn’t matter which one currency you are in – it just matters that you diversify the cash you hold within multi-currency accounts!
- Speaking of cash, you are NOT diversified if that is all you have! By which I mean that if “money” to you is paper currency then it is time for a change of perspective. Paper currency is fiat money – this means that it is “…money that is not backed by anything other than a government trust. Fiat money has no intrinsic value; it only has value at all because all participants in an economy agree to trust the government issuing the currency. All modern money is fiat money.” Hard assets are the only way to diversify out of the dollar, the euro, or any of the other failing global currencies. More on that topic here.
- You are Not diversified if your “broadly allocated investment portfolio” is built on funds and companies that are based in your home country. It’s no secret that the stock markets of the worlds biggest economies have been bumpy (to say the least) for a few years now. Meanwhile smaller “frontier” markets grossly outpaced traditional markets as far as growth. In fact, the top 5 best performing stock markets of 2012 were 1) Venezuela – up 302%. 2) Turkey – up 53%. 3) Egypt – up 49%. 4) Pakistan – up 49%. 5) Kenya – up 39%.
- Lastly, you are NOT diversified if you are completely tied (and thus both dependent on and beholden to) any one country. You have to diversify yourself! That means options like second citizenships, dual nationalities, becoming a part time expatriate, or even renouncing your citizenship entirely.
I dislike dwelling on the negative though.
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As always, leave any questions or comments below and I’ll try my best to respond.
What are some other benefits to real diversification? What are some other areas in which we often fail?