The following is in response to Dave Loeper’s article, Fake Diversification Exposed, which appeared on July 13:
Dear Editor,
Mr. Loeper’s “Fake Diversification Exposed” is itself ……………………fake!
His point sounds the same old drumbeat of the financial services industry:a buy-and-hold a basket of domestic equities, U.S. Treasury bonds, and cash. He offers what he claims to be a “proof” in his tables of the efficacy of his ideas. Well, let’s look at those results in a bit more detail.
The time periods Loeper discusses in his article are one year and two months and a week, and he mentions gold over the past one hundred years. Whose time horizons are these? Real investors are concerned about five, 10, 15, 20, and 25 year horizons. Broad diversification has worked well as compared to his narrow (but low-cost) allocation over those realistic time periods. Clients should not be focused on the next two months and a week, nor should they be the least bit concerned about the next 100 years.
A client’s net returns are what is important rather than their expenses. If two investments have the same potential and risk, then you should by all means use the less expensive one. This is not a reason to shift out of important diversifiers that cost a bit more but improve your risk-adjusted returns. I would gladly pay more to have higher net results in my portfolio. I could stick my money under a mattress if I sought only to minimize my expenses.
During the past decade, diversification was the key to success. Now we are in the “New Normal.” Even broad diversification will likely not suffice in helping clients achieve their financial goals. It will take broad diversification and tactical risk management to achieve client goals. Why? Very simply, during the last decade diversification worked well, as commodities were greatly underpriced and bonds were fairly valued, if not undervalued, at the beginning of the decade. This decade, no asset classes serve as fat pitches due to their being severely undervalued. The road to success will be to take more risk when assets are undervalued and rising in price and to reduce risk when they are overvalued and falling in price.
Loeper’s formula might work if you are investing for the next century, but I doubt it. For those of us investing for the foreseeable future, we need to do some hard work to garner decent returns.
Ted Schwartz, CFP®, AIF®
Chief Investment Officer, CIFG Funds
Colorado Springs, CO
Dave Loeper responds:
I agree investors have 10-, 20- and 30-year time horizons. I'd be happy to consider the supposed evidence of the efficacy Mr. Schwartz’ claims if he would provide the extent and probability of such outcomes. For example, he could examine 500 rolling ten-year periods for foreign stocks. In some of those periods foreign stocks will have outperformed and added a diversification benefit, like the decade ending in 2008 where they outperformed the S&P 500 by 2.18% annually. But, the decade prior they underperformed by 13.66% with increased risk (volatility).
One should never assume that a single 10-, 20-, or 30-year period represents normal long-term expectations. It does make great product marketing, though, and skims fees from advisors' and clients' pockets.
David B. Loeper, CIMA®, CIMC®
President/CEO
Financeware, Inc. DBA Wealthcare Capital Management
Richmond, VA
