Why August 1995 Changed Diversification Forever

netscape

Twenty four years ago in April 1994 one awkward kid changed the investment world forever and no one noticed.

The kid (okay he was in his 20’s) working in Mountain View California invented an internet browser that worked. He invented a way to actually find all the different website in the world. Before him “surfing the web” was less surfing and more rummaging.

In an IPO that was originally going to go out at $14, quickly changed to $28 and then on IPO day the stock closed at $58. Still today, it stands as one of the biggest IPO first day performances ever.

Netscape was the company and the kid’s name was Marc Andreessen. Jim Clark the adult on duty also helped Marc. But Marc was the guy. 

The Guy That Stopped Diversification From Working

The world changes one mode of communication at a time. And every time the human race adopts a new mode of communication investing starts a new era of investing.

Again, its not when the mode was invented. ARPANET was probably the first form of the internet in 1983 and then Tim Berners-Lee invented the World Wide Web in 1990. It’s when we “all” start using it. 

Nine communication mode changes… I’m sure there are more but these are the biggies. And again, it wasn’t when the mode was invented but when it was adopted that changed the world.

1440’s = The printing press  (history of the printing press)
1800’s = The telegraph (history of the telegraph)
1880’s = The telephone (history of the telephone)
1950’s = The television (history of the TV)
1970’s = The fax machine (history of the fax machine)
1980’s = The pager (history of pagers)
1990’s = The cell phone (history of cell phones)
1995 = The Internet (history of the internet)
2007 = The smartphone (history of the smartphone)

8 things I noticed when I researched communication change:

  1. The adoption rate is exponential faster with each new mode of communication.
  2. Each new mode of communication flatten the world even more.  
  3. It wasn’t just the internet, but the internet, faster download speed, smartphones and companies like Twitter that have flatten the world. 
  4. When the world flattens its increases investment correlation.  
  5. What use to be uncorrelated asset classes like international stocks and domestic stocks are now more or less just stocks.
  6. The internet isolates as much as it connects.
  7. The internet allows people to believe what they want to believe. You think gold is going to $100, then there are entire worlds on the internet that believe this. And if you believe gold is going to $10,000 the same is true.  
  8. The most powerful person in the world is Mark Zuckerberg, as he controls what more people see (and think) than the Catholic Church, Communism, the NRA or Islam.
  9. Cheaper trading fees (due to technology and web 2.0) have not helped performance.

As The World Gets Flatter – More Retirements Are Harmed By Diversification 

So here we are 24 years after the world started its most recent and significant flattening process. And big-box advisors and pick of the month newsletters are still talking about why diversification can help.

Below are 3 verifiable price charts that say diversification doesn’t work (read: protect).

Why only three?

There have only been three times in the past 24 years since the US markets fell more than 20%. And all three of them are below.

Why more than 20%? Because when the markets get rolling (to the downside) is when diversification is needed most. After all no one needs to be diversified to slow the growth of their money.

The 2008 bailout of Wall Street Started in Greenwich Connecticut in 1998

In 1998 Long Term Capital Management imploded (LTCM). Want to know what happens when you mix Phd’s, nobel laureates and Goldman Sach execs with billions of dollars.  You get a 25% correction in the US Stock Market and a 30% correction at the exact same time in the international stock market… and a best selling book.

The blue line in the price chart below is the MSCI International Index. The black line is the S&P500 index. Please note losing 25% and 30% does not feel like a diversified portfolio.

You want to know [partially] how we got to the Global Financial Crisis in 2008? Read about the 1998 bailout of LTCM.

DIVERSIFICATION 1998 – LTCM IMPLOSION, 25% Drop

1998 - LTCM crash

The definition of diversification is to have uncorrelated investments trending higher

The next price chart below is comparing US Domestic (the blue line) and MSCI International Index (the red line) during the Dot Com Crash.

When the dot com bubble burst from 2000 to 2002 stock diversification did not help. International or domestic, there was no difference. They both fell hard and people lost half of their money.

DIVERSIFICATION 2000 – DOT COM CRASH, 50% Drop

[optin-monster-shortcode id=”i72q7lv1bxf4vi8trgun”]

2000 Dot Com Crash

The next image below is during the Global Financial Crisis of 2007 to 2009. As you can see being diversified into domestic, large cap value, international, small cap, mid-cap and value didn’t save the investor either.

They all fell between 55% to 62%.

DIVERSIFICATION 2008 – Global Financial Crises, 58% Drop

ALL Stocks Rise and Fall Together Now – Why Diversification Doesn’t Help

There was a point in market history (pre Netscape) when markets around the world acted differently. When the Japanese market fell 66% in the 1990’s the rest of the world shrugged it off.

Right now 2/3rd’s of the people reading this blog post are heading for a big fall because they are believing a well diversified portfolio will save them. Even though it didn’t save them the last time the market fell more than 20% in 1998, 2000 and 2008.

That means if 10,000 people are reading this blog, 6,667 are heading for a very hard landing if they don’t do something.

And if they get this wrong, their sleep is going to deteriorate. Some of them will have to put off retiring all together. Some will have to go back to work. Some will have to move to a different part of the country or world to “down size.” Not because it’s the thing to do but because they depended on diversification.

Diversification stopped working 24 years ago

But if you get it right you can turn everything around today.

You can eliminate anxiety, angst, stress and overwhelm and know everything is going to be okay. Not because you believe so but you can verify it immediately that you’re okay.

To verify means you’ll be able to check and demonstrate that your positions are accurate, true and justified.

Think of it this way.

If the “stock ship” hits an iceberg (LTCM implosion, Dot Com Crash, Global Financial Crises) all stocks go with it (first class… steerage… it doesn’t matter).

See below for what I’m talking about.

It use to be that if you got the symbols right or the sector right or the diversification right, you’d be okay.

But the Internet, and fast download speeds and smartphones and Twitter changed everything. The investment game has changed.

If you don’t know the right symbol(s), it represents 100% of the problem. But once you do you’ve only solved 10% of the problem.

The other 90% of the problem is what I talk about in my newest Training, which I’ve titled, Wealth On Demand.

This is my Beta version, so if you see something that stands out that doesn’t make sense, just reply to this email after watching it and let me know. You can get a sneak peak right here.

In Your Corner,

RCPeck-Dig Signature.JPG     
RC Peck, CFP

Comments

Leave A Response