{"id":171,"date":"2010-09-23T16:19:53","date_gmt":"2010-09-23T20:19:53","guid":{"rendered":"http:\/\/www.cheapiv.com\/?p=171"},"modified":"2010-11-16T15:04:45","modified_gmt":"2010-11-16T20:04:45","slug":"why-you-can-throw-traditional-diversification-in-the-trash","status":"publish","type":"post","link":"http:\/\/www.cheapiv.com\/?p=171","title":{"rendered":"Why You can Throw Traditional Diversification in the Trash"},"content":{"rendered":"

Since I was in my college finance classes, the one thing that has been drilled into my head about investing is to diversify.\u00c2\u00a0 The traditional method of diversification is dead as we know it. \u00c2\u00a0 Here is the reason why: correlation.\u00c2\u00a0 Correlation is a measure of how well two assets move compared to each other.\u00c2\u00a0 In normal times, only a portion of a stocks daily movement was attributable to the overall market.\u00c2\u00a0 Most of the daily moves came from the stock, sector, industry news. Today, stocks are driven by what the overall market is doing compared to good company news.<\/p>\n

Traditional diversification was what our grandparents used (if they put money in the market at all.)\u00c2\u00a0 This entailed buying companies with different market caps and sprinkling in fixed income.\u00c2\u00a0 The older you were the more conservative you should become with a higher fixed income percentage.\u00c2\u00a0 The sad part is that our older generations have spent their savings and can no longer rely on their pensions, and social security.\u00c2\u00a0 Read the Plundering of Social Security<\/a>.\u00c2\u00a0 This very low maintenance approach worked for a long time as long as people believed in the theory of\u00c2\u00a0 just putting your money in a retirement account and expecting 8-10% returns. We know that we can not get 8-10% with traditional buy and hold. \u00c2\u00a0 Every stock is moving with the market these days in a highly correlated move.\u00c2\u00a0 To put it simply:there are too many risks.\u00c2\u00a0 Everyone should be afraid of the domino effect. I don’t want to get into the details of why our economy is not out of the woods yet.\u00c2\u00a0 But if we were, then why is the Fed talking about another round of quantitative easing? Where are the jobs, housing sales, automobiles sales, reduction in foreclosures?<\/p>\n

So the question you must ask yourself is do I believe that my current asset allocation, a.k.a diversification, will save me from another 50% drop in the market?\u00c2\u00a0 Well if it didn’t do it the first time, will it do it now?<\/p>\n

Do you think that a stock like PCLN will continue to double every 3 months?<\/p>\n

\"\"<\/p>\n

Investors have thrown traditional valuations in the trash.\u00c2\u00a0 We see decent companies with “ok” earnings gap on earnings announcement.\u00c2\u00a0 We are getting back to stock movement insanity of 1999.\u00c2\u00a0\u00c2\u00a0 Investors are getting that “can’t stop the bull” feeling again.\u00c2\u00a0 This is a great time for investors.\u00c2\u00a0 They are starting to get back to break evens in their portfolios.\u00c2\u00a0 Now is a great time to evaluate your portfolio to see if it matches your outlook. Consult your broker, I am sure he will say it is doing well and stay the long term course…(like your grandparents portfolio!)<\/p>\n

Here are a few wrinkles that I think you should add to your portfolio that your broker will not mention:<\/p>\n

Stock replacement:<\/strong> This is where you sell the stocks that you are in and replace them with an in the money option.\u00c2\u00a0 This will free up a ton of money and give you a built in stop.<\/p>\n

Premium Collection<\/strong>: Depending on your outlook, you can sell options against your portfolio to collect premium against your existing portfolio.\u00c2\u00a0 You can also add in delta neutral premium collection strategies.<\/p>\n

Sector Diversification\/Rotation<\/strong>: Analyze the stocks and their sectors, are you in the right stock? Can you rotate into a better candidate that has not made a move?\u00c2\u00a0 Can you take profits and diversify in that sector if you still like it?<\/p>\n

Taxes:<\/strong> Time to start planning.\u00c2\u00a0 Where can you take profits and losses to offset each other.\u00c2\u00a0 Collar positions that you are concerned with.<\/p>\n

Portfolio Protection<\/strong>: This can get a little tricky but very doable.\u00c2\u00a0 I suggest beta weighting your portfolio risk.\u00c2\u00a0 This is basically understanding what your stocks will move in correlation to a market move.\u00c2\u00a0 If the market goes down 10%, what will my overall portfolio do?\u00c2\u00a0 This is critical to not giving your profits back.<\/p>\n

For those of you who want more information on protection your portfolio, I created a quick video on collars for protecting your stocks.\u00c2\u00a0 I also create a course on stock and portfolio protection for those of you who truly want to learn how to protect yourself for the rest of your life.\u00c2\u00a0 How much are you risking in the market right now?\u00c2\u00a0 How much would you pay to protect your portfolio right now?\u00c2\u00a0 Not only can you offset potential losses, you can make money if you want to.<\/p>\n

The course covers: beta weighting your stock and portfolio risk, using option strategies to protect that risk, which options to buy and sell based on your assumptions, and which ETFs that you can use.\u00c2\u00a0 We also discuss inverse ETFs.\u00c2\u00a0 We talk about putting these hedges on and taking them off. We also discuss alternative cheaper ways to protect your portfolio.<\/p>\n

The course gives you a beta weighting worksheet, video tutorial and video case study of an actual portfolio.<\/p>\n

If you want more information please click here.<\/strong><\/a><\/h3>\n

Now is the time to evaluate your portfolio. <\/strong><\/span><\/p>\n

Even if you don’t want the course, check out the video!<\/a><\/strong><\/p>\n

No email required!<\/strong><\/p>\n","protected":false},"excerpt":{"rendered":"

Since I was in my college finance classes, the one thing that has been drilled into my head about investing is to diversify.\u00c2\u00a0 The traditional method of diversification is dead as we know it. \u00c2\u00a0 Here is the reason why: correlation.\u00c2\u00a0 Correlation is a measure of how well two assets move compared to each other.\u00c2\u00a0 […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[14,6],"tags":[84,94,83,17,34,8,90,49,91,9,12,92,93],"class_list":["post-171","post","type-post","status-publish","format-standard","hentry","category-commentary","category-educational","tag-asset-allocation","tag-course","tag-diversification","tag-market","tag-money","tag-options","tag-portfolio","tag-portfolio-protection","tag-stock","tag-stocks","tag-strategy","tag-time","tag-want"],"jetpack_featured_media_url":"","_links":{"self":[{"href":"http:\/\/www.cheapiv.com\/index.php?rest_route=\/wp\/v2\/posts\/171","targetHints":{"allow":["GET"]}}],"collection":[{"href":"http:\/\/www.cheapiv.com\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"http:\/\/www.cheapiv.com\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"http:\/\/www.cheapiv.com\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"http:\/\/www.cheapiv.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=171"}],"version-history":[{"count":0,"href":"http:\/\/www.cheapiv.com\/index.php?rest_route=\/wp\/v2\/posts\/171\/revisions"}],"wp:attachment":[{"href":"http:\/\/www.cheapiv.com\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=171"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"http:\/\/www.cheapiv.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=171"},{"taxonomy":"post_tag","embeddable":true,"href":"http:\/\/www.cheapiv.com\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=171"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}