Drew Brees is suing jeweler Vahid Moradi for selling him $9 million worth of diamonds that are now worth less than $4 million. Brees is saying he was convinced to buy diamonds to diversify his portfolio. There are 10,000 ways to better diversify than that. pic.twitter.com/Rtbj8q3632
— Darren Rovell (@darrenrovell) April 4, 2018
Repeat after me:
3. Real estate
5. Humility https://t.co/RFS4wE8iTs
— Downtown Josh Brown (@ReformedBroker) April 5, 2018
You can make a case for all sorts of other stuff in a portfolio. But you cannot make a case that they are necessary. The evidence suggests that diversifying away into other asset classes or strategies can enhance returns during some periods of time or that they can change the amount of volatility a portfolio experiences (in real life or just optically), but the evidence does not say this is somehow better than sticking with the basics over long stretches of time.
People will say “What about private equity? What about venture? What about hedge funds? What about managed futures? What about MLPs? What about options? What about foreign currencies? What about physical commodities? What about timberland? What about art and wine and classic cars and collectibles? What about crypto currencies?”
Your choice. But it works without these things just fine. And be aware that while these additive things may offer diversification benefits, they will also be adding complexity, new risks, higher costs that may or may not be recouped and higher taxes.
And, as in most areas of life, things that have some benefit sometimes also introduce drawbacks at other times. Accept no narratives saying otherwise.