Investment Management: Are ETFs The Way To Go?
Diversified Investment Management
Excerpts written by Bill Valentine: VALENTINE VENTURES (Bend, Oregon).
MYTH #1:
ASSETS THAT AREN’T APPRECIATING ARE BAD AND SHOULD BE SOLD.
This oversimplification represents several levels of flawed thinking. First, while most investors will tell you, “Buy Low / Sell High,” many financial advisors and investors alike, really do the opposite. They sell assets into periods like Fall 2008, and buy in periods like Summer 2009. They dump falling assets and pile into those that have already gone up. Secondly, many investors confuse impairment with price fluctuation. That’s very understandable, and is an outgrowth of the long standing practice of stock-picking. Stocks that become worthless fall notably in price first. Therefore, when something declines in price, it triggers the “emotional response” that the chance of permanent impairment is growing, and thus the idea of purging to prevent a total loss. BUT… what if the chances of a total loss are virtually non-existent? Like a portfolio (ETF) of all the big REITs in the country, spanning thousands of investment properties? The only way this basket becomes worthless is if all investment properties become worth $0. That will only happen at the end of the world. There are many other examples too. Commodities for one. The same is true for any basket of assets–you’ve diversified away the chance or impairment, thus there’s no need to purge.
Diversification of assets is one of the most important risk reduction tools at the disposal of financial advisors, investment managers and investors alike. Financial advisors should take this tact more often than they actually do.
To Be Continued…
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