This post The Lie Your Broker’s Been Telling You appeared first on Daily Reckoning.
Early gains on Wall Street fizzled and sent global stocks lower last week after reports that the U.S. is planning an additional $257 billion worth of tariffs on Chinese goods if upcoming talks between Presidents Donald Trump and Xi Jinping fail to end a trade war between two of the world’s largest economies.
Many stock indexes are already in official correction territory—meaning down 10% from recent highs—as investors worry about corporate earnings and global economic growth.
Is this week’s market activity the sign of another dramatic fall coming in the stock markets?
We’ll have to wait and see.
“Diversification Is for Idiots”
One thing I do know is that “diversification” is a bad idea, especially now.
Warren Buffett, one of the greatest investors alive, says, “Diversification is a protection against ignorance.”
Dallas Mavericks owner, Mark Cuban, said, “Diversification is for idiots.”
Why would these rich and successful entrepreneurs say such things? Because it’s true.
Beyond that, diversification is a zero-sum game. Gains in one class offset losses in another. Sure, it can be safe, but rarely does someone become wealthy by diversifying.
The most successful investors don’t diversify. Rather, they focus and specialize. They get to know the investment category they invest in and how the business works better than anyone else.
For example, when investing in real estate, some investors focus on raw land while others focus on apartment buildings. While both are investing in real estate, they are doing so in different ways.
The reality is that what the general public thinks of when they hear diversification isn’t really diversification at all. Instead, it’s putting all your eggs in different parts of the paper-asset basket.
One of the Sacred Cows of Money is, “Invest for the long term in a diversified portfolio.” This sacred cow needs to be shot. It’s bad investing, and it hurts millions of people— especially when the markets crash.
Change in the Rules of Retirement
The rules changed in 1974 with the passage of the Employee Retirement Income Security Act (ERISA), which opened the door for the 401(k).
Prior to 1974, employees could expect to get a paycheck for life from their employer after they retired, thanks to their defined benefit (DB) retirement plan.
After 1974, employers started moving employees from DB plans to defined contribution (DC) plans, which forced millions of people to become investors without the necessary education.
This led to the rise of financial planners. Today, it takes 30 days to become a financial planner and a year-and-a-half to become a massage therapist, so that should tell you something.
Financial planners essentially are the henchmen of banks and mutual funds to sell you their products, take your money, charge you fees, and use your money to get richer.
When they talk about being diversified, what they really mean is spreading your money around one asset class—paper assets. And when the paper asset markets crash, like they did this week, you lose.
Honest Money Talk
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