Image via WikipediaThat has been the mantra of the entire investment industry for 40 years now. However the cracks in the dam of diversification widen immensely when the markets go sideways, or begin to fall, as they are this year (and probably for years to come). Here are some reasons why diversification may well be a huge money pit over the next few years.
In a previous article, I explained how average investors are getting screwed by the mutual fund industry.
Ten years ago, if you invested in most diversified mutual funds, you would have made approximately zero on all your investments to date. (Ten years of ZERO!!!) The mutual fund industry is the most bloated, overpaid and valueless industry in the world today, in this writers humble opinion. They charge you fees from 2-4% for essentially "not managing" your investments. Many of the managed mutual funds out there are actual closet indexers (they follow the index of the country or market they are invested in by buying the large cap stocks as they appear in order in the index) You would do better simply by buying an index fund yourself and paying the .05% fee instead of 3-4% fees. Why is that?
Well there are several reasons for this behavior not the least of which is the fact that (and this has been subject of scientific studies) a trained monkey, picking stocks over an extended period utilizing diversification, on a statistical basis, does as well, within 1 or 2%, as almost all of these fund managers. In other words, they have no specific skill in picking stocks using diversification. Diversification works when there is a bull market, but there is no protection when markets plunge (as in 2000 or 2008) and the next two years could be absolutely devastating for fund investors. That is probably why there has been $50B (approx) removed from these funds over the summer. Being long term investors, most of those won't be back to the market anytime soon unless it is to pick specific stocks in small bull markets.
There have been many studies over the years in regard to this. In the current market, being manipulated by governments around the world employing Quantitative Easing (QE), large traders like GS, JP and the like using super computers and flash trading, in a market notable only for it's very thin trading, the word that comes to mind is "fraudulent" when it comes to stock prices, especially the large cap supposedly "blue chip" variety.
The fund industry wants you to believe that diversification will be your investment savior, however many savvy investors today know too well how this industry works. Just ask yourself, were you diversified in 2000? Were you diversified in 2008? Did your fund have investments in Enron? AIG?, Dot Bombs? Fannie? Freddie? Nortel?, JDS Uniphase? Citi, GM, Chrysler, AA, etc etc??? Did your funds make you "ANY" money at all? We need to change our thinking, now, and dramatically!
There is, in fact, a way to use this bloated industry, to pad your Retirefund over the next few years. There are indeed stocks out there, flying under the radar (thankfully) of this bloated industry, simply because no tainted ratings agency has noticed them (yet) or because these small caps are not yet big enough for the industry to promote to fund managers. I,m not talking about the \'under $2B\' range of stocks that the managers consider small cap. I,m talking about really small, micro cap entities that are forging niches in future markets that haven't hit the big time yet. That is where smart investors are looking in this market.
Find those gems that have a foot hold in new markets, are front runners with nimble and smart management, in a market soon to be targetted by the big dogs of the fund industry.
Now you are on to something. Something that truly makes sense, in a senseless market. Today, you have at your finger tips all of the technology you need and more. More than the so called experts have ever had in the past, so, use it! Do your home work. Dig for information, and evidence of advantage in micro caps, and stay on top of that information. Prosperity will follow.
Using this simple strategy last year, I advanced my own retirefund by over 220 per cent. Last month alone, I doubled my money on one stock and I believe that over the next two months, it will double again.
This month another of our picks is up 36% on discovery of a new green tech energy process that may revolutionize how we deal with (and utilize) carbon emissions.
Are they all home runs? Of course not. Anyone who tells you they only hit home runs is lying through their teeth. However, if you hit a home run every 5th time at bat, then you will be a heavy hitter over the year. If you get a single, a double or a walk on 3 of the other 4, you will win the batting championship, hands down.
Here's to your Retirefund!
HP
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