Forget about diversification

Discussion in 'Strategy Development' started by 220volt, Dec 19, 2006.

  1. 220volt


    I want to hear what others are thinking about this.

    I am changing my tactics from diversification to buying only one ETF and running with it.

    Look at the attached file. You have USA, Europe, Latin America and Asia broad markets in there. You will notice that they all follow same pattern. The only difference is in risk/return. Bigger gains, larger the losses of course, but that doesn't matter here since it follows the same pattern. For example:
    If I would to invest in all ETF's in the picture my average return would be 60%.
    If i was to invest in only ILF (Latin America index) my average return would be 120%.
    Why then diversify when all of the markets are following same pattern. You might say you need to diversify to cushion the blow but you will also cushion the returns so it doesn't really matter.
    You can also use same timing methods(inflation, fed rates, sentiment, macd, technicals or whatever you use) as for trading s&p 500 since all of these ETF's are following s&p 500 as it seems.

    I am seriously considering concentrating on only one ETF and forget about stock picks while the market is in the bull mode. This way it is much more simple with higher probability of return and it takes way less time to research.

    You can even use best 6 months strategy combined with macd or moving averages.

    Any comments are appreciated.
  2. If you have an with it, but never dismiss more than one edge...

    now... if you have an edge...why not try to find a completley different one that does not correlate with your equity curve? It's all about how you spend your time...

    Do not put all your eggs in one...

    I have a YM method that I am adding to my Forex soon as I can get the capital...don't worry I am a retired CTA
  3. fletch2


    Would have been. Big difference.

    Which one will outperform next?

  4. why not invest into spiders (SPY) only; start off with a lump sum and put 10% of your pay once a month into buying more spiders plus re-invest your dividends -> this way your costs will be low and you won't ever buy at a high price because you will be dollar cost averaging not mention the diversification, tax efficency's and a proven system that over time grows in value. If you feel the need to trade, open another account, I have found having a investment a/c and a trading a/c lets you be more objective and hone in what your trying to achieve in each a/c. Just look back a year, 2yrs, 5yrs, 20yrs too see the wealth you could of generated just starting with $5,000 and putting $100 per month into buying more shares. The longer you hold onto a good investment the more likely you will show a profit.

    Good luck.
  5. Likely an exchange traded fund is already diversified, representing dozens of stocks. No need to diversify further.
  6. One what?
  7. elit


    omelette? :confused:
  8. I have reservations about South America funds. Some South American countries might not be stable. I recall about year 1995 Mexico devalued it's peso - suddenly, overnight, without warning - I recall 2:1. I remember reading about year 2001 Argentina experiencing a debt crisis, banks closing, massive layoffs. I recall a few weeks ago reading Venezuela elected President Hugo Chavez. reports Mr. Chavez is leading a socialist revolution. I wonder what Venezuelan citizens feel about the private property rights of foreign capitalists.

    I am not so much interested in the return on my investment as in the return OF my investment.
  9. MarketSci


    220V -

    I'm not sure what the point of your graph is. I can show you many time periods when any one of those regions seriously underperformed the rest of the world.

    The whole point of diversification (as Fletch said) is that we don't know what WILL happen, only what DID happen, so we hedge our bets towards the mean.

    I see this in my own strategies all the time...some are running hot now, some are running cold now, but the net effect is that my portfolio is (almost) always frothy warm.

  10. Go out right now and purchase The Stock Traders Almanac or go out to the public library. There is a page in there that tells you at what time of year historically each ETF performs strongly. As usual, historical patterns do not guarantee future returns. . .

    Warren Buffet said this "Wide diversification is only required when investors do not understand what they are doing."

    The only question left now is do you understand what you are doing?
    #10     Dec 19, 2006