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Diversifying Your Investments – Now vs. 1990s and Early 2000s
I’m no investments expert, but I have never lost money investing in my entire life. To qualify that statement more specifically, I have never had a negative return on my total investment portfolio in any given calendar year. There have been years in my past where I didn’t invest anything since I didn’t have any money, but every year I’ve invested in something, I’ve always made money that year.
-By Caleb Jones
I make sure of this every year, because throughout my life I’ve followed what I was taught by Brian Tracy, which was taught to him by Warren Buffett. That is, rule number one of investing: “Don’t lose money.” Rule number two is to refer to rule number one. So I don’t lose money. Very simple. Or at least, this used to be simple.
Historically, I have never diversified and never even worried about it. I followed one of Warren Buffett’s other rules, “Put all your eggs in one basket, and watch that basket.” I would study economic conditions and trends, and invest all my money in that one thing that looked like it would explode in value a little later.
This worked great for about 15 years. During the 1990s, I could see the real estate boom, so I invested 100% in real estate and nothing else. I completely ignored stocks, which were also booming at the time, because I could tell stocks were a bubble (as they usually are in our post-corporatist era).
People I knew made fun of me for not investing in stocks. Didn’t matter. As a young man in his 20s, I made so much money in real estate during the 90s (and early 2000s), that there were some years when I made as much money in my real estate investments as I made at my full-time job for the entire year. As the 90s ended, stocks crashed, as I expected they would. I knew guys who lost $300,000 in their retirements in less than three months. I knew one guy who almost killed himself. I knew stocks were a risky bubble, and I was right. My real estate profits continued.
As the 2000s rolled on, I could see that now real estate was becoming a bubble. Damn! So I reluctantly got out of real estate and put 100% of my money in gold. The rampant overspending of the “small government conservative” George W. Bush convinced me, among other factors, that gold was going to do very well no matter what else might happen. Once again, people who knew me thought I was being crazy, or at least a little weird. Gold? Gold was a terrible investment! It was all about real estate baby!
Once again, I was right. As I talked about in my book, I made so much money in my gold investments that they funded my entire divorce (moving out, maintaining a second home, all the legal fees, etc). Then 2008 came along, real estate collapsed, and everyone lost their asses. I was already out of real estate by then, so I lost nothing. My gold profits continued (though not as strongly as before).
Shortly after all this, I had a feeling that gold’s heyday was over, so I looked for the next “one thing” that I could put all of my money into. I couldn’t find it. I looked and looked, I read and researched, but I couldn’t find anything like real estate in the 90s or gold in the 2000s that would look like it would take off. Everything either sucked or was just “okay.”
That was several years ago. Now, here we are in the late 2010s, and still I don’t see anything good. Every investment sector kinda sucks, at least a little.
- Stocks are in a bubble again. The Dow just crossed over 20,000 yesterday, a historic event. The Nasdaq and S&P are also at historic highs. All these numbers are bullshit and over-inflated, and will correct (i.e. crash) at some point in the next 2-3 years at the most, unless something very weird happens.
- Bonds are also in a bubble, particularly government bonds, even more so than stocks, thanks to artificial zero (or negative) interest rates.
- Real Estate in most parts of the Western world is also in a bubble, though admittedly not as bad as stocks or bonds, and exceptions can be found. Regardless, it’s not anywhere near the slam dunk it was in the 90s.
- Currencies are complicated. Governments all over the world are devaluing all of their currencies on purpose, via overprinting, to stave off recessions. Deals can be found if you devote several hours a day to watching international currencies, but I don’t have that kind of time. Cryptocurrencies like Bitcoin are exciting and promising, but not a slam dunk.
- Precious metals are going to do well in the long-term, but still a little risky in the short and perhaps medium-term because of people’s silly tendency to flock to the US dollar whenever catastrophe strikes. A strong dollar usually means weaker precious metals (though not always).
- Commodities are going to probably do well long-term, but there’s no guaranteeing that, since a new technology could be invented at any time that can instantly kill their value. (How much will oil be worth if/when someone invents a little, inexpensive battery that can power your car or aircraft forever?)
- Emerging markets, particularly SE Asia, are going to do well in the long run, but they’re still not the slam dunk real estate was in the 90s or gold was in the 2000s.
So here we are, living a slowly collapsing civilization where there are no slam dunks anymore, at least none that I can see.
Faced with this problem, I did the only other thing available to me to ensure I don’t lose money; I diversified the hell out of my investments. Since I don’t know what will be good (other than a few hunches), I’ve spread my money out all over the place to minimize my losses if anything bad happens.
Today, I am so diversified that it’s kind of ridiculous. The other day I was looking at my investment spreadsheets and just shaking my head. This was so much simpler (and more fun) during the 90s and 2000s when I could just focus on one thing. Oh well. Those days are gone.
I can’t tell you exactly where and how I’m invested, because I don’t give out personal financial information over the internet (and neither should you). I can tell you that I’m invested, in some way, in every sector I listed above, all of which in a very diversified way, in addition to some other sub-sectors I haven’t mentioned.
That is my laymen’s advice to you. Since no one can tell with any certainly what the next big “one thing” is, if you have money to invest, diversify the shit out of it. Kevin O’Leary’s rule is that you shouldn’t have any more than 5% of your money in any one investment or one sector. If you do the math on that, that means you’re invested into at least 20 different sectors. Yikes. I’m not quite that diversified, but close.
It’s a pain in the ass, but it’s what I think is necessary in order to protect your money in these uncertain times. In several decades, once the West gets through the pain that is coming, maybe you’ll be able to bank on that “one thing” again. But until then, I think you should be as safe and diversified as possible.
Note: I am not a financial expert and I’m not qualified to give investment advice. Please consult with a trained financial professional before investing any large amounts of money.
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Shura 2017-01-26 15:04:36
Nice article. Just curious, as a non-American, how was the housing uptrend obvious to you in the late 90's? Bitcoin sure was a slam dunk in 2013. God, if had had the balls to sell I would not have to trade them now. Maybe you could talk about how you know when to get out. It's one of the most difficult aspects and you deal with it very humbly. When looking for things to buy, how about cheap stock markets around the world? Meb Faber compiles them quarterly, and currently Russia, Spain, Brazil and Italy are terrific. Sure, it would have been cool to catch the 2016 lows, but they are still a good deal (see appendix at the bottom: http://mebfaber.com/2016/12/02/missed-780-gains-using-cape-ratio-thats-good-thing/ )
Sean 2017-01-26 17:41:01
I like rental real estate that cash flows... as long as there is a margin for future uptick in vacancies seems pretty safe to me.
Caleb Jones 2017-01-26 17:55:19
Just curious, as a non-American, how was the housing uptrend obvious to you in the late 90’s?Very obvious. You could buy a house and sell it 2 years later for $50K - $80K profit or more. Based on my estimates, it would be like that for 8-10 years, and I was right. It got even more crazy after 2000.
Bitcoin sure was a slam dunk in 2013Yeah but few people knew that. By "slam dunk" I mean it's a slam dunk right now, and I know it right now.
Maybe you could talk about how you know when to get out. It’s one of the most difficult aspects and you deal with it very humbly.That's a little complicated and it depends on what you're talking about (real estate, gold, stocks, etc). I always know that whatever is doing great will start doing badly in a few years, and I try to get out before that happens, the sooner the better. Good example: I got out of real estate around 2004ish, because I could see the party was coming to an end soon, but "soon" I got wrong. Things didn't crash until 2008, so I got out FOUR YEARS too early where I could have made more money. I was seriously kicking myself. But that's okay, since getting out sooner is always better than getting out too late.
When looking for things to buy, how about cheap stock markets around the world? Meb Faber compiles them quarterly, and currently Russia, Spain, Brazil and Italy are terrific.Those are speculative, not slam dunks. For speculation, yes, they're great, but only speculate with a tiny percentage of my investment funds. Again, I don't want to lose money.
I like rental real estate that cash flowsI do too. I will be investing in international real estate around 2025 when I make my exit. That will be fun.
Way_Of_Man 2017-01-26 22:50:12
You mean to tell me you missed out on the art bubble, of 2014! For shame! On a more serious note, Jim Rogers was long Russia before Trump got elected. Now he's potentially doubling down on it. That might be somewhere to look for the near future
Celephel 2017-01-27 07:02:48
Hey Caleb, I was wondering, if you agree that Stocks are in a huge bubble and are very likely to crash in one to three years, what speaks against short selling the S&P500 with a low leverage and just be patient enough? Harry Dent even goes so far to predict the crash to come later this year: http://economyandmarkets.com/economy/forecasts/harry-dent-2017-outlook-volatile-year-from-all-angles/ An alternative would be to just hoard cash as Warren Buffett did in 2015/2016 (last time I checked it were 241Billion) and just wait for something to happen … a real estate crash in China? … the next country to get sick and tired of the EU and do a something-xit? … everyone realizing that Trumps magic wand doesn't work and therefore reversing this ridiculous Trump-rally? Whatever it is it will be a feast for a patient bear 🙂
Caleb Jones 2017-01-27 12:19:30
On a more serious note, Jim Rogers was long Russia before Trump got elected. Now he’s potentially doubling down on it. That might be somewhere to look for the near futureI know. He's very excited about Russia for some reason. I don't really understand why. At some point I may research this, but I never invest in anything unless I understand it in full detail. The Russia thing I don't quite understand. (Yet.)
I was wondering, if you agree that Stocks are in a huge bubble and are very likely to crash in one to three years, what speaks against short selling the S&P500 with a low leverage and just be patient enough?Yes. I will do this. I've already done things like this and I've made money. However, I only do this with my speculation money (money I can afford to lose). I would never do this with the bulk of my investments. Shorting things is very complicated and somewhat risky. Jim Rogers has been shorting the big American companies for quite a while and he complains all the time about how much money he's losing doing it. I don't have his kind of money to lose. You probably don't either.
An alternative would be to just hoard cash as Warren Buffett did in 2015/2016 (last time I checked it were 241Billion) and just wait for something to happenThat's more or less what I'm doing. Way ahead of you on China real estate post-crash...
bluegreenguitar 2017-01-27 12:49:30
I believe "buy low and hold" and "buy and hold" usually make sense for most amateur investors. If something doesn't have long-term potential, you'll probably become more active, use shorter-term vehicles and will end up competing against pros. For example, if someone put $10k in 1992 in VFINX (S&P500 index fund), they would now have ~$60k-$100k (depending on dividend reinvestments and taxes). With current dividend yields of 1.9%, this means a yearly payout of about 12-20% annual return on the original $10k. While not an incredible investment, it's still a very solid "buy and hold" investment for an amateur investor. Real estate or any investment class that provides an annual yield might fall into the same category of "buy and hold." I believe most major, non-opaque overvaluations of large asset classes are easy to discern. If you pay attention and follow a value-based approach, you'll see when the price to dividend ratio falls way below practical numbers. 1998-2000 and 2006-2008 followed this pattern. 2017-2019? I'm not sure. It's easy to see larger movements, but predicting smaller shifts takes more skills and effort. So, the question remains - what to do with cash from current dividends and other ventures? I say either "buy and hold" or wait to "buy low and then hold" unless you want to go pro.
Shura 2017-01-27 15:33:16
Mr Jones, could you define "speculating". How is buying cheap stock markets around the world speculating? Given that it's based on a decade of earnings, it's actually value investing, that is, knowing that the underlying business is much more valuable than the price indicates. Not trying to make a quick buck but rather with a view to at least 1 year, even a decade if things go well.
Caleb Jones 2017-01-27 18:41:07
I believe “buy low and hold” and “buy and hold” usually make sense for most amateur investors.I agree.
Mr Jones, could you define “speculating”. How is buying cheap stock markets around the world speculating?Investing: Putting your money away, for a very long time, with the goal of getting the typical rate of return for the time. (Today that would be 2%-5% at most.) Speculating: Putting your money away, usually briefly, with the intent of exceeding the typical rate of return for the time, but you might lose some or all of your money.
ryan davies 2017-01-28 22:20:50
if everything is in a bubble, wouldn't a short strategy be most effective?
Shura 2017-01-29 16:09:04
Ok, you saw housing prices trending upward, but what told you it was the start of a multi-year trend?
Caleb Jones 2017-01-29 21:12:56
if everything is in a bubble, wouldn’t a short strategy be most effective?Speaking generally, yes. But as I said above, shorting stuff means you're constantly losing money until the crash occurs, so you'd better be right, and be willing to lose a lot if it takes longer than you thought.
Ok, you saw housing prices trending upward, but what told you it was the start of a multi-year trend?Because of baby boomer demographics (they were going to be at peak spending patterns for about 10 years) and interest rates that were on a decline from a high instead of an incline.
Shubert 2017-01-30 06:32:29
Caleb, Kurzweil said that by 2025 we'll be able to 3d print effectively at the atomic level. How do you see your life changing when that happens? Where will you travel? How will that affect your relationships?
Gil Galad 2017-01-30 09:35:33
@Shubert: if Kurzweil is right, anyone who lives into the 2030s can do whatever the fuck they want, including loony stuff. It's a bit like asking what one would do if aliens visit us; there isn't much the individual can do to prepare for it. I'm personally very interested in what humanity may do in the future (space habitats, terraforming, interstellar travel, etc), which is why I hope some of his predictions come true so that I can have the lifespan to witness those things. If you're on the older side and want a chance to last until it comes true (because frankly I think Kurzweil is gonna be late on his predictions), I'd recommend saving money and/or donating to the relevant research fields. There's a recent video of Peter Diamandis injecting a few million stem cells into his leg; the guy seems super serious about living long, lol.
Caleb Jones 2017-01-30 11:03:24
Caleb, Kurzweil said that by 2025 we’ll be able to 3d print effectively at the atomic levelYes, I've talked about that before several times. I don't think it will be 2025, more like the 2040s.
How do you see your life changing when that happens? Where will you travel? How will that affect your relationships?Everything in my life, and yours, will radically change. It's impossible to say exactly how. (The Western world might even be saved.)
OldTimer 2017-02-06 22:48:20
Making short selling bets is also dangerous because government intervention has become a constant threat to short sellers. Whether it's temporary bans on short selling or simple market manipulation and propping up, being a short seller isn't what it used to be. That's in addition to all the other normal risks. That and you can be MF Global'd anytime in the post Corzine economy. The next bubble will probably be government spending. The last and final bubble which will take all the others down. I realize the government is already spending a lot and people rightfully think it's already in a bubble, but you ain't seen nothing yet. Japan has gotten away with 220% debt to GDP. Surely the US can get away with 350%+. Muni bonds might be an ok investment in that situation if there is massive infrastructure spending and you time it right. That and crowdfunding projects, like the guy who crowd funds his house flipping business (he buys foreclosures and fixes them up for people to live in). Source: http://www.zerohedge.com/news/2016-09-21/crowdfunded-house-flipper-raises-1-million-12-hours-and-it-only-costs-him-14
JK 2017-02-12 07:44:04
"(How much will oil be worth if/when someone invents a little, inexpensive battery that can power your car or aircraft forever?)" Toyota invented it (and others are following in their wake, of course): they have it in their Hybrid models. Seems they aren't sold in the US: there's always great resistance to any car using less/no oil fuels in the US... surprised?
stan 2017-02-17 10:41:42
Caleb, I used to handle retirement plans. We beat the stock market every year for a dozen years until I sold out to my partner. Diversification is key to your stated goal. The math on that is clear. And avoid standard stock allocation formulas and strategies. Be nimble. The huge firms are harmed by their own size and paradigm blindness. But don't trade too much. Understand your own risk/reward tolerance and your own investing strengths. I agree with your assessment of the current investment environment. I am presently more in cash than I would prefer, but I want to have some ammunition when opportunities eventually present themselves. Never feel like you HAVE to make something happen. Sometimes waiting is the best option. One note -- be long term in your thinking re: shorts. Jim Chanos has been preaching that China is a huge bubble for years. His facts are solid and his conclusions are obviously correct. The only issue was time. Let's face it, no western country could possibly manipulate itself into a soft landing from where China is. And the Chinese leadership still doesn't even understand basic economics. They will crater. The news out of China isn't good. The rich there are sending money abroad as fast as they can. It won't end well. How could it when they have dozens of newly constructed ghost cities? They clearly don't understand what they are doing long term. So -- Short China long term. A Chanos style hedge fund where you invest with a willingness to ignore it for years. Or think about shorting those economies which supplied the China bubble (raw material suppliers like Australia). Think about the next order effects -- who will benefit if China craters. Think about how the dictatorship will respond with force -- internally and in foreign policy -- when it hits the fan. What nearby countries might be threatened by their wag the dog reaction? What US companies will benefit if/when China wags the dog?
Caleb Jones 2017-02-17 11:40:20
One note — be long term in your thinking re: shorts. Jim Chanos has been preaching that China is a huge bubble for years.I agree China is in a bubble right now, and is going to have some major problems in the short and medium term.
Short China long term.Disagree. I think long-term, as in several decades from now, when China as moved through it's bubble and pain, it will do very well. (Or at a minimum, better than the West as a whole.) For the record I have no Chinese-specific investments at the moment, because of its current bubble.
POB 2017-02-20 13:14:41
"Meb Faber compiles them quarterly, and currently Russia, Spain, Brazil and Italy are terrific. " Brazil has sure a cheap stock market right now, simply because our fucked-up government was able to melt down the economy through 8+ years of a leftist agenda. But nobody knows how much longer it'll take for companies to fully recover. So it's a good bet (with good upside) but very speculative and for the long run (plus you must know exactly what you're doing).
Shura 2017-02-20 17:01:07
Why is it you and Mr Jones insist on calling "speculative" buying cheap stock markets for the long run? That's the exact opposite of speculation. Stocks must be seen as a claim on the future stream of free cash flows the business will generate. Buying cheap countries is getting a good price for that stream. This is according to historical averages. It's neither short-term nor does it require appreciation of stocks. It's exactly what you do when you do not speculate.
POB 2017-02-21 07:02:50
Because every investment in variable assets is speculative. Greater risk for greater reward, simple as that. But you're forgetting the big IFs the government and corporatists bring to the table (specially in the 3rd world) so we tiny investors are never sure about what those guys are going to do. With a simple maneuver they can change the entire game and fuck up BIG large companies that look solid on paper. Google "Petrobras" and "EBX" and you'll know what I'm talking about.
Shura 2017-02-21 07:53:49
Did you read what I said? Who told you that every investment in variable assets is speculative? As I just explained, if no price appreciation is needed for the investment to make sense, it's not speculative. Returns are a sum of price appreciation AND dividends/buybacks. Also, I'm always talking about whole countries instead of single companies. Your argument about Petrobras is irrelevant. Anyway, living in constant fear like you must be very sad... Just invest in diversified stocks cheap relative to historical averages and stop caring.
Caleb Jones 2017-02-21 13:37:55
I have a post coming up shortly that explains the difference between speculating and investing.
Alan 2017-03-27 15:59:29
Look into Ethereum. Like bitcoin but you can embed smart contracts in the blockchain so much more can be done with transactions.. Ethereum went from less than $10 last year to $50 recently and there's no other cryptocurrency like it right now. Big fan of your writing btw.