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3.0 DIVERSIFICATION
3.1 CASH
Cash looses buying power from inflation, but holds it's value when the market drops (crashes). In a drastic
market correction such as the one we experience during the 2008 financial crisis and the 2020 Pandemic,
where numerous assets such as stocks and real estate became devalued. During such a period, many
view the depreciated values as an opportunity to invest while assets seem less inflated. Unfortunately, also
during this period CASH may NOT be available to buy at these seemingly bargain prices in stocks and/or
real estate. Therefore with a sufficient allocation of assets in Cash, one can take advantage of a depressed
market condition.
On Nov. 2, 2015, an investment newsletter publisher, Bonner & Partners, looked at the 2008 financial crisis
and raised the question "is it reasonable to hold cash?". According to Bank of America, CASH outperformed
stocks & bonds for the first time in 25 yrs.
3.2 LEVERAGED INDEX EXCHANGE TRADED FUNDS
Statistically about 80% of mutual funds do not perform any better than the S&P 500 stock Index
Beginning in 2006, leveraged ETF’s were introduced where these funds perform 2 times or 3 times the normal
index. Of course leveraged ETF’s works both ways and goes UP as well as Down by the leveraged amount.
There are triple leveraged ETF’s on the 3 major stock market indexes. namely the Dow Jones 30 Industrials
(stock symbol: UDOW), the S&P 500 (UPRO) and the NASDAQ 100 index (TQQQ).
(http://money.usnews.com/money/personal-finance/mutual-funds/articles/2012/07/09/are-leveraged-etfs-just-double-or-nothing-bets)
If you are interested in the performance of a particular stock, go to Yahoo.com/Finance and use the chart to
ompare the stock with either UPRO or TQQQ to see it’s relative performance with a Leveraged Index ETF.
For example, on Oct 2, 2012, a comparison of the performance of APPL with both UPRO and TQQQ
shows APPL over a 1 year period has underperformed UPRO and TQQQ by about 20%.
A link to that chart is: http://finance.yahoo.com/q/ta?t=1y&s=AAPL&l=on&z=l&q=l&c=tqqq+upro&ql=1
In 2014, only 8% of U.S. stock funds did better than the S&P500 through Nov. 30, 2014. Even Warren Buffet
has become a fan of index funds. Cash from Buffet's estate goes to a trust for his wife where his advice to the
trustee is to put 90% in a low-cost S&P500 index fund (such as Vanguard) and the rest in bonds.
Therefore a simpler strategy is to have 50% or more in a Leveraged Index ETF such as TQQQ and the rest in CASH.
In Oct. 2015, a Certified Financial Analyst studied the performance of TQQQ and concluded that TQQQ ranks
better than all other ETF's and less than a dozen individual stocks competitive with TQQQ.
The reason for diversification is to achieve more consistent returns over time and reduce overall
investment risk by allocating assets to CASH, across various equities (stocks), fixed interest securities
(such as bonds), and different industry sectors.
A portfolio can become over/under weighted with over/under valued investments where diversification
dilutes rather than balances the portfolio. Diversification can be a challenging task because fluctuations
in each of the categories and industry sectors may not be independent of each other.
With the globalization of markets, ways to offset wide fluctuations in one specific investment category
or industry is quite difficult. Therefore, my conclusion for an effective diversification strategy is to hold
just CASH and one of the major stock market index ETF's. In addition, selling options is a method to
generate income (CASH) and/or to acquire additional index ETF's in one's portfolio.
I do NOT invest in mutual funds for the following reasons: (see section 3.2 below)
(1) Mutual funds lack liquidity and can NOT be traded during the open market hours where limit orders can
NOT be used to buy or sell at a selected price.
(2) Annual capital gains tax may be incurred even if the value of the mutual fund has not increased.
(3) Fees in mutual funds are normally higher than Exchanged Traded Funds (ETF's)
3.3 Triple Leveraged NASDAQ 100 Index ETF
The stiock symbol for the triple leveraged NASDAQ 100 index ETF is TQQQ.and was started in Feb. 9, 2010.
The performance of TQQQ from inception on 02/09/2010 (from the 2021 annual report) is shown on Chart 3.3.1.
The chart shows $10k invested at inception on 2/9/2010 is worth $558k on May 31, 2021 and a
tabulation showing the average annual return of TQQQ vs the NASDAQ 100 index
