Am I Diversified?

No this is not something to do with a popular but silly segment on a TV show where the people calling in to ask that question already know the answer.

It’s the idea of really trying to avoid UNINTENDED concentration. Here are some familiar examples of both intended and unintended concentration.


  • Warren Buffet, Dan Loeb and many other deep value managers that buy big positions in stocks they have high conviction in.
  • An index investor who puts 100% of their money in an S&P index fund or a few stock index funds. yes you may have a few funds but you’re still 100% stocks, and in this correlated world it’s not diversified. But for many this is intentional – I’ve had people tell me they want the stock exposure and are willing to ride the waves (including 2008, 2002, 2001 type markets).
  • Start up company – of course the owners want the full benefit if things go well so a young business owner might be just fine with holding a significant part of her net worth in her company.


  • you buy a restaurant stock, a retail clothing stock,  and a financial stock, then call up the above-unmentioned TV show and ask if you are diversified. Sorry folks but these three stocks would likely all move together in serious market moves (and and down).
  • An index investor who buys a few funds thinking they ARE diversified.
  • Being long a Canadian and Australian index fund and being long commodity related investments. And being long China and Brazil. For example, a Canadian who invests in a Canadian index fund, then thinks he is diversifying by adding emerging markets and commodities is NOT diversified. Canada’s economy has a very large commodity influence and therefore, finance, real estate and consumer confidence-related positions will move together to some degree – same if you are an Australian investor.
  • You live in a country with a shaky currency – even if you diversify, the currency could on an inflation-adjusted basis, hurt you or help you tremendously. The “hurt” part is the worry though ok?

Truly Diversified

Some people don’t want to be diversified because they don’t think they can make money – because in their narrow mind, diversified = owning 50-100 stock positions at 1-2% each of your portfolio. As Tony Horton would say, “expand the mind a little bit.”

One could diversify money management styles – how about having different baskets (which could each be aggressive or conservative in their own right) of:

  • a deep value fund
  • a short only fund
  • a managed futures fund
  • a covered call, dividend stock strategy
  • A frontier markets fund
  • Managed currency fund

Again, each of these strategies could be more or less aggressive based on various factors but consider the diversification. A deep value fund likely did well as tech stocks were crashing in 2001. There are (believe it or not) short only managers that make money even when the market is up. Imagine the diversification effect they offer in a down market! Managed future funds can go all cash and use more leverage for aggressive investors – they often follow a chart/trend following strategy that is a diversifier away from fundamental investing. Covered call dividend strategies can offer a fully invested, high yield strategy that works well in flat, slightly down and slightly up markets (2013 was likely tough for these guys as their positions were likely repeatedly called away). Frontier markets are possibly the only low correlation stock markets left in the world. Currencies move for their own reasons, and stocks often react to them – and they offer nice diversification.



If you sold calls on JNJ in 2013, you likely lost the position!

What Do I Do

I use a few of these strategies with risk management tools found in trend following. Some of these areas I am not skilled in, and avoid (if I knew them all perhaps I would use them all!). But I use deep value, trading, options and currencies in my strategy. I tend to be very conservative but what I do could be dialed up to be more aggressive if desired.

What do you do? Are you ok “riding the market” or do you employ return-enhancing and risk management diversifiers to your portfolio?


 Disclosure – at the time of this writing, one of my clients through my advisory firm owned shares of JNJ.