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Author: jackcrow Big gold star, 5000 posts Feste Award Nominee! Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 35396  
Subject: Re: Thinking About Diversification Date: 2/19/2006 10:39 PM
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Charlie,

I certainly don't feel picked on so don't sweat that.

What is irritating is and out of my/our control are the assumptions of the reader/poster at the other end of the cyber world. There are some things that we can do to minimize that confusion and some things that we cannot.

If people want to pin on me the label of the 50k supporter then refuting it more then twice is a waste of my time.

I strongly disagree that we both(who ever both is) need to lay out a complete theory of diversification. As you know one size doesn't fit all. What is conducive to growth is to continue the banter about possibilities. Sometimes we get to the annoying point of hair-splitting definitions, the type that make you yawn to read.

I'll go back to a point I made about duration; diversification is a tool. Unlike simple metrics, which anyone can yahoo or a few take on the trouble of calculating for themselves, it is a powerful tool that if you aren't attentive and careful it will use you rather than you using it.

If forced I illustrate my hierarchy this way:
Goals
Strategy(ies)
Tactics

Diversification is, for me, a tactic. It is a means to implement my strategies, which are a means to reach my goals. This means that my diversification needs are shaped by my goals and strategies. I don't manage risk entirely via diversification. This keeps diversificaion, for my purposes, as one tool among others to manage varying types of risk.

This may or may not be true for other posters on this board. This also shapes how I respond. I stand by what I posted before; I do not believe that a portfolio of one or two bonds is diversified. This does not make that choice wrong or right. For me it doesn't pass the common sense defintion of "what is diversified". If I had 30 green M&Ms I wouldn't not say that I had a diversity of M&Ms. If I had one M&M of any color I wouldn't state that I had a diversity of M&Ms.

What I try to recognize is that for some diversification is either a meta-tactic or it lies within thier strategies. This is their major tool, strategy, for managing all of the risks they face within the fixed income markets. If this is so then they need to find a langauge and a way of identifying the risk(s) of greatest concern to them and diversifying them to a tolerable level.

If some hypothetical investor is looking to buy one 1k bond to balance their 5k in stocks and they buy one 3 year treasury to garner the "risk free" aspect while nearing similar duration as a full spectrum of treasuries I can't answer the question "Am I propery diversified?" nor can I answer the question "Did I make a good decision?". I'm happy to chat within them about their decision in hopes that they find for themselves the answer.

I do firmly believe that playing with definitions is unwise when we are speaking to multiple tiers of investor understanding. It may work on a personal level but in a public forum we need to stick to common understandings and work from there. It simply is not fair to ask someone who is just getting comfortable with price/yeild movements, treasury direct and the online bond shopping to play fast and loose with definitions they thought they already understood. This makes them feel like they know even less, that the mountain is too tall and that maybe bond funds are best.

For me, this moves the one bond, 2 bonds, 50 bonds, into the realm of tactics. Its answering the question; how do I deploy this cash within this market that best benefits me? Diversification, risk management, time to use, cash flow needs, time available, etc are all legitimate issues to question and to manage. What tools best address these issues? What tactics do I employ? Will one 3yr treasury cut it, is that best I can do under current conditions? What tactics or set of tactics best implements my strategies?

'nuff for now

jack
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