Sunday, October 30, 2005

Why a broker's "Diversify Your Investments" is stupid sometimes

You've seen the information handed out from brokers: at age X you should have Y% of your investment money in stocks, Z% in bonds, and so forth.

This is generally, stupid, though, especially in times like this, for reasons I've noted before.

So, it seems like a new entry in the "no shit, Sherlock" department is this article from the NY Times:

IF you want to know what's up in the bond market, talk to Robert L. Rodriguez. As manager of the FPA New Income fund since 1984, he has never lost money in any calendar year.

Today, Mr. Rodriguez says he is shying away from making major bets on bonds because of all the question marks that abound. Among them is the uncertainty over whether interest rates will continue to rise, eroding the value of older, lower-yielding bonds. There is also uncertainty over inflation, which eats into bond returns. And now there are the unknowns surrounding the first transition at the helm of the Federal Reserve Board in nearly two decades...

Because Mr. Rodriguez thinks that bonds aren't compensating investors for all the current risks, he is content to have as much as 45 percent of his fixed-income portfolio in cash or cash-equivalent investments. The question for individual investors is, should they follow his lead?

It's certainly tempting. While the yield on 10-year Treasury notes has risen recently, it's still less than 4.6 percent. Yet inflation, as measured by the Consumer Price Index, shot up 4.7 percent over the 12 months through September. In other words, you're not earning anything on long-term government debt, adjusted for inflation.

You should diversify investments, but into those that, you know, actually make money.

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