What Diversification Really Means

The market is in the tank. Your account is going down the toilet. Better call your broker or financial planner and find out what is going on.

He will have the answer why my account is losing so much money.

After a long conversation he told me that the market would come back and I needed to diversify my portfolio. Change to more defensive stocks and heavier weight in bonds. Yes, that sounds sensible.

Let’s see, he said sell some of the cheaper high flyers that had been in the account, but were not worth much now. If I sell them I will have a loss. I paid $40 for one of those and it is now $8. Another I bought at $27 and is now $2.40. They can’t go any lower. I’ll wait for them to come back and then sell.

He said I should buy some General Dynamics. It’s a good company. They have a good balance sheet, but when I looked it up the stock has dropped from about $100 to $50. It is a good company and can’t go any lower.

All the big institutions own Google. In came out in 2005 at $150 and went all the way up to $700. Now my broker says it is a steal at $300. Maybe I should have a few shares. After all the big guys all own it.

These have all come down a little, well 50% is kinda a lot, but they can’t go any lower. There is big money waiting to buy them now.

Hey, Joe Sixpack, investor, if there is so much money sitting on the sidelines waiting to scoop up these bargain stocks why haven’t they done so? Joe, do you know when to buy and more importantly, Joe, do you know when to sell? Did that smart money sell before the market took that 50% hit?

Poor Joe (and getting poorer) hasn’t 2 brain cells to rub together.

When listening to those market mavens on TV they say stocks are cheap now. It seems to me they have been saying that for months and months. All those folks talk about valuation. If stocks are such a great value why do they keep going down? What does “cheap” mean?

The problem with cheap is there is no definition when it comes to stocks. Corporate fundamentals are changing almost every day. Old industries are disappearing and new ones are forming every few years. Where are the buggy whip companies and does anyone make wooden carriage wheels any more?

It is difficult to diversify because it is a guessing game. Wall Street has diversification formulas that brokers are supposed to follow. What they really mean is to put some in stocks, some in bonds, a small amount in money markets, some in municipals, international funds, etc, etc, etc.

What diversification really means is spread the client’s money over several categories and hope he breaks even. Don’t fall this old Wall Street conundrum.

Al Thomas’ book, “If It Doesn’t Go Up, Don’t Buy It!” has helped thousands of people make money and keep their profits with his simple 2-step method. Read the first chapter at http://www.mutualfundmagic.com and discover why he’s the man that Wall Street does not want you to know. Copyright 2006 All rights reserved.