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Diversification is a misunderstood concept.
Most investors think that if they are diversified in several companies, over various sectors, well, they are diversified.
Not true. Here’s why:
The U.S. stock market saw one of its fastest declines on record in March 2020. The Dow Jones index experienced its second worst day ever, and the relatively newer VIX, a measure of volatility, hit an all-time peak.
If your portfolio was in stocks only – unless you were in a few choice food, healthcare or software stocks – your entire portfolio was suffering.
But if you were well diversified amongst a basket of stocks and non-stock strategies that take advantage of different market environments, well, you slept much better at night. (Go here to see how to add these strategies to your portfolio.)
Which is why diversification should go well beyond choosing a handful of stocks and calling it a day.
As investors, we are all faced with bullish, bearish and neutral market environments, so it is our job to utilize the power of different strategies that thrive in these different market environments and use them simultaneously.
This is why I utilize several different options strategies like these at the same time. I don’t have a crystal ball. I have no idea when a global pandemic will hit, or a financial crisis or geopolitical turmoil. These are events out of my control.
But what I can control, is how I choose to invest to prepare for those precarious situations, but also for the good times as well.
For instance, I have a short-term strategy that I like to use around earnings season. When others were watching their long-only portfolios decline by as much as 50%, our short-term strategy was making upwards of 65.9% . . . and on the way back up our short-term strategy made money as well.
In 2020 as a whole, this short-term income strategy, that reacts independently of the overall market, is up 299.8% on a cumulative basis.
So, when the market came back to life, we continued to see profits in our short-term income strategy. Why? Because again, the strategy is totally independent of the overall market environment.
But our gains didn’t stop there. We were also able to make tremendous gains in our bullish strategies as well.
As I stated on Thursday, over the course of 2020 I have managed to return 118.6% in Gold (GLD) while the ETF only returned 17.6%…36.4% in the S&P 500 (SPY) while the ETF returned 36.4%…81.6% in 20+ Year Treasury Bond (TLT) while the ETF only returned 13.5% . . . and those are just a few of our income-producing results for ETFs.
What about stocks?
Good question.
In United Rentals (URI) we have returned 92.6%, 91.6% in D.R. Horton (DHI), 28.6% in HP Inc. (HPQ) and 12.6% in KB Homes (KBH), while the stock lost -13.0%. In every instance we outperformed the benchmark stocks and ETFs by three to five times.
And these are just to name a few.
What about our bearish strategies? Well, you can probably guess that they absolutely crushed it when the market tanked. But those same strategies came back to normal when the market continued its upward trajectory . . . and I’m perfectly fine with that because I understand that is how it is supposed to work . . . and overall our portfolio benefitted on the way down and on the way up.
2020 taught us a lot of important lessons, among them to think about diversification a little differently.
Remember, diversification is about utilizing a group of sound strategies that take advantage of different market environments and using these strategies simultaneously, knowing we have no idea what is going to occur in the future. We control what we can by making the RIGHT decisions. Not hoping for the best.
If you wish to learn how to use the same long, medium and short-term strategies I have used for years…and more importantly, how I use them simultaneously, click here to attend my upcoming webinar. I am certain this will help you prepare for whatever the market dishes out in 2021.