I have never bought into the whole diversify across asset classes theory. It’s one of those dumb ideas that sounds good theoretically, but doesn’t pass the common sense rule, but I will get to that later. I am not much of an economist. Most of them use too much math in an inappropriate way, that does not reflect the real world that I live in. This may sound harsh, but the truth is I don’t invest for theoretical gains. I invest to make money. So, if a theory doesn’t work, I don’t care how many proofs someone throws down, or how advanced their equations are, I won’t use them.

The recent Great Recession, has shown that diversification across asset classes did not help prevent losses. You only need one false example to prove a theory false. So, I have taken a distrust for diversification across asset classes to a new level, I am now officially against it.  The point of diversification is theoretically to hedge losses by investing in assets that are uncorrelated. In other words, if your stock investments fall in value, bonds rise, or if gold falls, real estate doesn’t. I won’t get into the specifics of which asset classes are supposedly uncorrelated. I am definitely treading on thin ice, in the investment world, with this notion. But last year we had real estate falling, stock prices falling, bond prices falling, and commodity prices falling all at the same time. The theory is clearly wrong.

The flip side to the theoretical minimizing loss, is that, even if were correct, you are also restricting profit. You are in essence betting against yourself. To protect yourself from the volatility of the stock market you might invest in bonds. But if Treasuries are essentially at slightly above zero, you are better keeping your money in your safe at home. At least that way you can throw yourself a big party if you feel like it.

But back to the smell test. If it smells rotten why buy it? Very few professional investment persons can claim expertise in multiple fields of investments (asset classes), and as a result would be unlikely to perform as well across these asset classes. If professionals cannot master so many different pieces of the pie, how can a beginning or part time investor hope to compete? That was a rhetorical question. We can’t. Let’s get back to using our skills to our advantage. If you are skilled at bong trading, then perhaps you should  stick with that arena. If you have a strategy to make money in the stock market that gives you an edge, go for it. Why would any rational person invest in areas in which they have absolutely no competence or understanding? They shouldn’t. I have stressed over and over, find your edge and stick to it.

But I still haven’t answered the title question.  The answer for me is yes.  Diversification is prudent, but not among different asset classes, but within the areas that you can claim competence. Let me get into specifics. I am a value investor at heart. Despite anything else I try, I understand value investing; it makes sense to me. Finding Net Net stocks not just in the United States but internationally, puts in a sphere that I am confident in, but diversifies me in ways that help mitigate against what I don’t know. I own stock in a Mexican company, A Chinese company, A Canadian Company as well US companies.

But I can also look for value stocks in different industries that may not react to the macroeconomics in the same way. Biotech will often rise and fall at different times than Industrials. If I am looking for bargains, I don’t care where they arise, just that I can buy them at a great deal. Look for the best deals, and only invest in great opportunities. Hopefully, this will translate into better long term profits. I am not alone in my ideas. Peter Lynch did advocate against Deworseifying, or having so much diversification that it hurt your returns.

Disclaimer: The usual for me. I am not an investment professional, so my often unorthodox views don’t hurt me in my career aspirations. As always, don’t trust anything on the internet without doing your own research, including this site. I may be right, but if you don’t understand why I am, you can still hurt yourself in the investment world.

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