You're Probably Not as Diversified as You Think.

-_-

So you have a stock portfolio, a 401k, maybe even a Roth IRA.  Do not make the mistake of thinking you are well diversified because you have your money mixed in a number of different stocks of varying "risk".  Stocks are a single class of investments, and your mutual fund/IRA/401k is merely a collection of stocks managed by someone "smarter" than you.  Sure, you may have some bonds thrown in there somewhere but as far as I'm concerned those can be considered a neutral asset (bond yields are at all time lows, and the yield you do get is merely poor compensation for the growing risk that the Fed may one day either raise rates or lose the ability to control the bond market).  We carry these equities thinking that the fundamental driver behind its value is the efficiency and performance of the equity itself.  While this is partially true, markets rely far more on monetary policy, exchange rates, regulations, and the expectations of future monetary policy & exchange rates (these have a direct effect on equity/asset performance and efficiency, as well as on the value of savings).  It is the continual free flow and expansion of credit that enables growth for many of the stocks in my 401k, and i'm sure others are no different.  If the punch bowl is removed, the suffering is non-discriminatory.

The point is..... many of us sleep comfortably looking forward to retirement because we have a 401k and some Apple stock, but the truth is that all of your eggs are in very few baskets.

My advice for diversification would be to: Get foreign, get physical, get alternative, get active.

It sounds like a catch phrase on a motivational speech, I know, but seriously, here are some examples:

Get foreign
- Foreign currencies and bonds: yield exists in some places.... weigh this with monetary policy risks of a given country.
- Foreign equities in emerging economies: not as easy or as secure as you may like, but surely growth opportunities exist in developing nations that would not be stifled by a domestic meltdown.

Get Physical
- Precious metals: a traditional store of value, get things you can actually touch.... in todays economic environment there is a growing disparity between what exists electronically or "on paper" and what actually exists.  Don't be caught on the wrong side.
- Hard Assets: collector items, real estate, whatever you fancy and can get a good deal on.
-  Physical Cash and change: this may seem a bit conspiracy theory, but its common knowledge that only about 3% of money in existence is in cash, the rest is just numbers on a balance sheet.  In the event of a Cyprus-style capital freezeout-and-then-tax your bank account, its good to have some cash on hand to mitigate losses.

Get Alternative
- Guns and Ammunition:  One of my favorites, increasing gun control laws increase the value of guns.  Easy to resell, value doesn't deteriorate over time, simple.
- Bitcoin: Volatile, but a rising star.  Do not make the mistake of considering a "bubble" to be a dramatic rise in prices.  A bubble occurs when "Future Demand - Current Speculative and Real Demand" goes negative.  As an alternate to major currencies, I would say the future demand of this asset presents a very attractive risk-reward ratio.


Get Active
- Gardening:  grow your own herbs, spend less on groceries, sell your goods
- raising cattle/farm animals:  Sell or eat, watch out for coyotes and mad cow disease.
- Recycle things: little bits can add up