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By dividing up your money in 50% stocks and 50% bonds, many would think that they are diversified and spreading out their risk. But in reality, you really are taking much more risk than you think. Because, Ray pointed out emphatically multiple times during our conversation, stock are three times more risky than bonds.
Fifty-fifty portfolio, you really have more like ninety five percent of your risk in stocks. So 50% of your money is tocks, it seems relatively balanced at first glance. You would have closer to 95% or more at risk because of the size and volatility of your stock holdings. Thus, if stock tank, the whole portfolio tanks. So much for balance.
From 1973 through 2013, the S&P 500 has lost money nine times and the cumulative losses totaled 134%. During the same period, bonds lost money just three times and the cumulative kisses were just 6%. So, if you had a 50/50 portfolio, the S&P accounted for over 95% of your losses.
Ray said, when you look at most portfolios, they have a very strong bias to do well in good times and bad in bad times. And thus your de facto strategy is simply hoping that stocks go up. This convention approach to diversifying investment is not diversifying at all.
Does this change your view as to what it mean to be diversify? I sure hope so. Most people try to protect themselves by diversifying the amount of money they put into certain investment assets. One might say, fifty percent of money is in risky stock and fifty percent of money is going tin secure bods to protect. Ray is showing that if your money is divided equally, your investments are not equal n their risk, you are not balanced. You really still putting most of your money at risk. You have to divide up your money based on how much risk/ reward there is, not just in equal amounts of doors in each type of investment.
You know something that 99% of investors do not know and that most professionals do not know or implement. But do not feel bad. Ray says most of the big intuitions with hundreds of billions of dollars are making the dame mistake.
