Against my better judgement I have been watching a TV show called 'Filthy, rich and homeless', which in the last episode strangely reinforced the lesson of diversification.
Diversification is often described as the only 'free lunch' you'll ever get with investments. Just by the simple act of spreading
your money around a range of different asset classes (shares, equities, property etc) an investor's total return over time is supposed to improve with reduced volatility along the way.
You don't get to eat diversification, of course, but the idea is you should be able to have some more nourishing meals in retirement if you stick to the regime than you would have if you'd plonked the lot in, say, a finance company. (Investing in two finance companies does not count as diversification.
A financial planner told me yesterday that the Institute of Financial Advisers recently fined one of its members for placing a retiree client's total assets in two failed finance companies - Bridgecorp and Property Finance Securities. The adviser's fine was a pathetic $5,000 - of a maximum $10,000 - plus he can continue practising under the IFA's auspices.)
Diversification is probably an instinctive thing as Kieran (I think it was) one of the TV program's homeless stars demonstrated. Kieran the bum lives in a tent in a central London park. The police often confiscate his tent. To offset the risk Kieran buries some of his other meagre possessions away from the tent. He might lose the tent but keep the grubby sleeping bag.
It worked for Kieran but the 'free lunch' theory of diversification is taking a battering this year in financial markets. All asset classes are heading south. This may be a temporary aberration but a recent article in 'The Economist' suggests superannuation fund investors have over-paid for the free lunch.
"So perhaps diversification has been a free lunch after all. Not for the pension funds, but for the fund manager," the article concludes.
Kieran the bum still has somewhere to sleep, though.
David Chaplin
Photo: the cast of the TV1 series 'Filthy,Rich and Homeless' Picture copyright BBC
