How to achieve “true” diversification

Traditionally, every man and his dog has bought into the idea of the 60/40 portfolio.

60% bonds, 40% equities.

This structure has been peddled from every corner of the industry. It’s probably in your pension, and perhaps you’ve gone down that route yourself.

And is based on one central dictat – diversification.

But there is a fatal flaw. I think the diversification that people think this 60/40 portfolio offers… is dead.

And I think you can do much, much better…

It all starts with one very basic question.

Why do we invest?

We invest today because our bank accounts are paying us 0.01% interest on our deposits.

And because inflation means our hard-earned savings are losing purchasing power each and every year, they sit in that bank account.

I recently hand drew a little chart for a friend, to illustrate how crucial that extra few per cent can be over time – the classic compounding argument.

It shows what happens to £1,000 over 10, 20, and 30 years at the bank, or at various rates of return.

Source: editor’s own scribblings and calculations

People like to say that investment returns have averaged 10% over the last 100 years.

That is for the S&P 500, and doesn’t account for inflation. It’s also horribly precise.

I prefer to say that depending on when they get started, investors can broadly expect to generate 6% to 10%, most of the time.

Anyway, the point is that even over just ten years, you can expect to more than double your wealth, relative to a savings account, even if you only achieve pretty standard returns.

To me this is the most crucial point about investing today. We invest to protect and grow our wealth over and above what can be achieved by a bank account.

Most bonds no longer do this.

They offer incredibly meagre returns – maybe half a per cent, maybe 2%. Hardly a flea’s hair above the savings rate on your deposit.

This is because the prices have been pushed so high.

Higher prices = lower yields, as the yield is just a percentage figure representing the size of the payout (“the coupon”) relative to the price of the bond.

If the £4 coupon bond has risen from a price of £100 to £400 in the market, its yield (£4/£400) is now only 1%.

So it offers very little return. But with the price having advanced so far because of high demand, there is very high risk. Just by returning to its nominal value – you could lose 75% of your money.

So much for “risk-free return”.

I’m sure you’ve heard this argument before, but it’s worth repeating.

Bonds now offer nothing of the sort.

Instead, they are more like “return-free risk”.

You stand to gain very little – just a per cent or two, but are risking a huge loss to achieve that.

Equities meanwhile are also being pumped ever higher by record low interest rates.

The lower the rate on bonds, the more attractive equities become in relative terms.

So if interest rates (aka “yields”) rise… then bond prices crash by mathematical logic (yields up is the same thing as prices down, just two ways of saying the same thing)… and equities crash too.

Suddenly, that old 60/40 idea doesn’t look so good any more.

That diversification you were told it gave you… doesn’t truly exist.

If interest rates rise (the yields on US government bonds have more than doubled since last summer) then both stocks and bonds will fall quite dramatically in tandem.

So much for diversification.

But hell (you might be thinking), Kit, this is both depressing and unhelpful. I need to know what to do now!

Quite right.

You need to achieve what I’ve started to call “true diversification”.

True diversification is not some inherited concept, from out-of-date books or well-intentioned but un-critical financial advisers.

It’s fluid and involves looking at the world, its various risks, rewards, and potential changes, and building a portfolio of truly uncorrelated assets.

Some attack and some defence.

So let’s start with equities.

Many stocks are doing well because of low interest rates.

Growth stocks (which promise great profits in the future, but you might have to wait a while) do well in a low interest rate environment because it doesn’t cost them much to borrow money to fund their growth.

These might make good returns in the short term, as long as yields on bonds stay low.

So maybe you want some of those.

But then what if rates rise? You need to protect against the alternative future – where bond yields rise.

This means two things – assets which benefit from rising rates, and then also some funds or allocations which will survive if rising rates cause stock and bond markets to crash (a likely result of rising yields).

Then, there is inflation. Currently it is low and has been falling, but that could change.

Equities and bonds have benefitted from falling inflation.

So you want to balance your equities with assets that might benefit from rising inflation. Some equities can do this. There are alternative assets and some well-managed funds which can too.

Anyway, before I go further down this rabbit hole…

Do you get the point?

The stock-bond portfolio that you were told would always protect you is nearing the end of its useful life.

You need better. You need higher-level thinking, and you need genuinely uncorrelated investments in order to achieve true diversification, to truly protect and grow your wealth.

I firmly believe this to be the only way to protect your money in the months and years to come.

And with negative rates headed swiftly for UK banks… the imperative to achieve returns above bank deposits is only growing stronger.

Whether interest rates are rising or falling…

Whether inflation comes back with a vengeance, or remains shackled by central bank repression…

You need to know how to respond.

One man here can offer this better than anyone.

Charlie Morris’ long running The Fleet Street Letter Wealth Builder is a fully managed portfolio service for UK investors, offered at a bargain price.

I truly believe this to be one of the best value financial products on the market I’ve ever seen.

People should be fighting over subscriptions to this service.

Click here to find out more.

Charlie does a fantastic job both of managing and explaining his portfolio, and I’m not surprised his followers are almost fanatical in their devotion to him.

If you are floating on a sea of uncertainty going into 2021, then this product is for you.

Charlie’s service can look after the bedrock of your funds.

It has returned something in the region of 50% over the last four years. Through a careful and thoughtful approach, Charlie is steering people’s savings through one of the most threatening periods most living investors have seen.

With excess and speculation taking ever stranger forms, markets at record valuations and central banks digging further into the deepest hole they have ever dug…

You need to achieve true diversification.

And Charlie Morris can help you do that.

I may not see eye to eye with him when it comes to the energy transition….

But like a captain steering his ship through uncharted waters, his “Money Map” is helping investors up and down the country to navigate this extraordinary market we find ourselves compelled to invest in.

I believe I’m right in saying that today is your very last chance to snap up our latest offer to join Charlie.
It’ll be the best investment you make all year.

Take up your subscription today, through this link.

I realise that I am encouraging this pretty forcefully…

But I mean what I say when I tell you I can’t endorse this fully enough.

Very best wishes,


Kit Winder
Editor, UK Uncensored

2 Comments
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