BoatBanter.com - stock market huckster are running out of carefully cultivated myths(that transfers your wealth to them)that are falling to reality, buy and hold, invest for the long term, stocks are cheap right now, and now the biggie:Diversification

On Sun, 31 May 2009 10:32:53 -0700 (PDT), wrote:

stock market huckster are running out of carefully cultivated myths
(that transfers your wealth to them)that are falling to reality, buy
and hold, invest for the long term, stocks are cheap right now, and
now the biggie:Is Diversification A Strategy Of The Past?

http://finance.yahoo.com/news/Is-Div...BQFdGNLodO7sMF

Is Diversification A Strategy Of The Past?
• Simon Maierhofer
• On Thursday May 28, 2009, 12:28 pm EDT

In the early 80s, DOS was the most commonly used and recognized
operating system (OS). In fact, DOS became the OS of choice and turned
Microsoft into the leading software and computer technology provider.
Newer Windows versions however, have proven more effective and
reliable. At one point, MS DOS was the standard. Today, MS DOS is
nearly obsolete.
Ever evolving products and standards are the result of a dynamic and
efficient market place. The stock market dynamics of the last two
years have certainly raised the bar and forced investors to rethink
their strategies. Is diversification the financial equivalent of MS
DOS?
For decades diversification has been the standard for many investors.
The idea behind diversification is clear: exposure across multiple
asset classes increases the odds of picking pockets of strength, just
as placing multiple bets across the Roulette table gives you a higher
chance of picking the winning number.
Pros and cons of diversification
A diversified portfolio for example, deflected the aftermath of the
dot.com bust quite well. Even though the tech-laden Nasdaq (Nasdaq:
QQQQ - News) and Technology Select Sector SPDRs (NYSEArca: XLK - News)
lost some 40% in the year 2000, several industry sectors such as the
Financial Select Sector SPDRs (NYSEArca: XLF) and Vanguard Consumer
Staples ETF (NYSEArca: VDC - News) gained 20% and more.
On the flipside of the coin, regarding diversification and asset
allocation, one could argue that placing bets on all sorts of asset
classes doesn't make much sense. If you don't even fully understand
the U.S. stock market, why would you want to commit money to
international stock, bond, or commodity markets? If you can't even
drive an automatic, why would you push your luck with a stick shift?
Investment strategies work... until they stop working.* And more often
than not, they become popular at the wrong time. Let's take a look at
some numbers.
The year 2007 entered the history books as the last year of the boom
and the beginning of the bust, at least for equities. The S&P 500
(NYSEArca: SPY - News) and Dow Jones (NYSEArca: DIA - News) were still
able to eke out single digit gains, while commodities had started
their final push to all-time highs.
International developed markets and emerging markets kept their
winning streak alive for a little longer compared to U.S. equities,
but were in a confirmed downtrend by early 2008. Global markets -
previously considered 'decoupled' from the U.S. markets - became
conjoined again.
Rising commodity prices in early 2008, neutralized losses in domestic
and international equities.* This continued until prices for wheat,
corn, soybeans, oil, copper, nickel, and many other commodities
plunged up to 70% within months of reaching all-time highs in Q1 08.
ETFs affected include the PowerShares DB Agriculture ETF (NYSEArca:
DBA - News), United States Oil Fund (NYSEArca: USO - News), and
PowerShares DB Commodity Index ETF (NYSEArca: DBC - News).
With falling commodity prices, diversification had lost its touch. The
onset of the financial meltdown was the beginning of the end' for
diversified portfolios.
Even before the financial meltdown, the*ETF Profit Strategy
Newsletter*considered financials a 'downward spiral with no stop-loss
provision' and recommended to unload all asset classes in favor of
short ETFs. Those short ETFs recorded double and triple digit gains in
2008 alone.
The end of diversification?
From the 2007 highs to the March 2009 lows, the S&P 500 lost 55.19%.
How did a diversified portfolio fare over the same period of time? A
portfolio with equal exposure to the Vanguard Total Stock Market ETF
(NYSEArca: VTI - News), iShares Barclays Aggregate Bond ETF (NYSEArca:
AGG - News), iShares Dow Jones US Real Estate ETF (NYSEArca: IYR -
News), iShares MSCI EAFE (NYSEArca: EFA - News), iShares MSCI Emerging
Markets ETF (NYSEArca: EEM - News), and iShares S&P GSCI Commodity ETF
(NYSEArca: GSG - News) would have lost 48.12%.
Admittedly, 48.12% is better than 55.19% but either way investors lost
about half of their money. That is simply not acceptable.
Did the 2008 meltdown usher in a new area that will render
diversification obsolete just as windows did with DOS, or is the
recent rally an indication that diversification bears timeless wisdom?
The*ETF Profit Strategy Newsletter*has become the default destination
for profit minded investors. According to the newsletter, the bear
market is not yet over. In fact, a deflationary environment will
continue to put pressure on all asset classes.
Even the recent rally is no surprise to subscribers. The following was
foretold in February: 'The best target for this low is 6,700 for the
Dow and 700 for the S&P 500. Extreme pessimistic sentiment may drive
the indexes even towards Dow 6,000 and S&P 600. A multi-month rally
founded on this low should lift the markets by 30-40%.'

Despite the recent 30% bounce, the major indexes are still some 40%
below their 2007 high watermark. At this point, it would still take an
additional 75% rally and many years just to break even.
A pro-active, profit oriented approach on the other hand would put
this mission on a fast track. By implication, a diversified approach
always strings along weak sectors and asset classes that don't
contribute to overall gains; in fact they often turn out as
performance drag.
Rather than investing in a dozen asset classes (domestic and
international small, mid, and large cap stocks, domestic and
international bonds, commodities, real estate, etc.), many of which
that are less than transparent, investors may want to consider
investing in only one or two areas that offer the biggest and most
likely profit potential.
While many lost 50% or more when the Dow Jones dropped from 14,000 to
below 7,000, some actually used short and leveraged short ETFs to
their advantage and recorded double and triple digit gains. Long-term
indicators such as P/E ratios, dividend yields, the Dow measured in
gold, and investor sentiment point towards new lows.
This will bring to an end (or at least put on hold) the era of
diversification. Complacency will result in more losses. During the
Great Depression, the Dow Jones lost more than 89% of its value.
During those 34 months, there were five counter trend rallies with
gains ranging from 25% to 50%. Only a pro-active, profit oriented
approach protected investors from more losses.
The March and June issue of the ETF Profit Strategy Newsletter
provided a detailed short, mid, and long-term outlook for the U.S.
stock market, along with target levels for the ultimate market bottom.
The Newsletters also included target levels for the end of this bear
market rally, along with timely corresponding ETF profit strategies.
Don't allow your portfolio to become extinct like MS DOS

It is pathetic to watch the jabbering heads on CNBC, Bloomberg, etc.,
proclaiming the recession "over". Don't get suckered into the
continual series of "chump" rallies.

ted