Despite near-unanimous endorsement among mainstream advisors,
the strategy of portfolio diversification has a huge, glaring
flaw: Namely, when large sums of liquidity begin to flow into
global investment markets, formerly disparate trends become strongly
correlated. And markets that go up together ultimately go down together;
in turn, the value of diversified portfolios goes down with them.For years now, Wall Street has tap-danced around the liquidity
risk. Here’s how former Citigroup CEO Charles Prince described
it in July 2007:
“When the music stops, in terms of liquidity, things
will be complicated. But as long as the music is playing, you’ve
got to get up and dance.”
Three months later, Prince announced that Citigroup’s quarterly
earnings would be down 60%. Within the year, Prince had danced
himself out of a job. Diversified investors around the world
were feeling the liquidity crunch.
But after many miserable months for stock and commodity investors,
the markets rebounded together — almost in lock-step. Commodities
lifted off in late 2008, and stocks followed in March 2009. Everything
that declined together was going up together, and market watchers
began to take notice.
“Liquidity with respect to stocks has become indiscriminate,” reported
a widely respected market technician. “When money’s flowing
in, they all go up. When money’s flowing out, they all go down.”
Mainstream investors finally began to recognize the phenomenon
Elliott Wave International’s Robert Prechter warned about in
his 2002 best-seller, Conquer the Crash.
Turns out, now almost 10 years after Prechter coined the phenomenon “All
The Same Markets,” the correlation is still positive. Unfortunately
for millions of diversified investors, the outlook is not.
According to a new report authored by Prechter and his EWI colleagues,
the second round of liquidity crisis is fast approaching and
perhaps has already begun. If you invest your money in a diversified
portfolio, it’s time you read this incredible new report now.
This
article was syndicated by Elliott Wave International and
was originally published under the headline New Report: It’s Dangerous to Diversify — Find Out Why.
EWI is the world’s largest market forecasting firm. Its staff
of full-time analysts led by Chartered Market Technician
Robert Prechter provides 24-hour-a-day market analysis to
institutional and private investors around the world.
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