The Diversification Myth

I am proud to say that my investments are not diversified.
A client said to me, the other day, after looking at my portfolio, "that's not diversified!" An indignant finger pointing at my computer screen. As if he had caught me with my hand in the cookie jar.
To which I replied, "So?" After a moments consideration I saw the lights go on in his head. Seeing that there was a mind in there willing to hear a new point of view, I continued with another question, "Should I have some of my money in Financials?, how about real estate? Home builders?"
"Well, I suppose not, at least not right now" Came his reply.
"Good thinkin'" I said.
Being diversified means several things to me that some financial advisers may not agree with.
A portfolio that is too broadly diversified lacks commitment and shows a deficit in research and maintenance. A portfolio is a living breathing thing and it requires care and feeding and constant attention.
I know of several cases where, during this credit meltdown, many money managers have let their clients ride the elevator right down into the basement. And they did it under the mantel of diversification. Why? because that is what they where told to do in "Investing 101"
Well that's not what we do here. We are engaged, tuned in and turned on. This is fun, it's not about following a formula. We look for whatever is working and employ tools to take the greatest advantage of opportunity.
To me being diversified is an inferior method of insurance and it practically guarantees a mediocre return on investment. You want insurnce? Buy some options, Put on a spread trade, use an inverse ETF, employ some leverage. There are so many great products and tools out there, that hiding behind portfolio diversification just means that you don't know about them or how to use them.
Time to enroll in "investing 102"
Get educated. I do this myself constantly. As a matter of fact, Just this week, I picked up an Options strategy book that I haven't looked at in years. It's old enough that it refers to options pricing in fractions, but it contains some really good techniques that I had forgotten about.
Market conditions are constantly changing and so should your portfolio and your strategies. Stay tuned in, turned on and energetic. If not, just put it all in a mutual fund and forget it. If you are lucky you might just manage to keep pace with inflation.

JT

Legal disclaimer: This post is for informational purposes only and is solely the opinion of the writer. Nothing in this post should be considered investment advice. Before investing in anything, the reader is encouraged to do his or her own research and consult with a certified financial advisor. Which John Tompkins makes no claim to be. John Tompkins and Toro Creek Investments accept no liability for financial losses or damages incurred by the reader because of this post.