80% of my investable income is in cash, precious metals and a small number of stocks. That might seem crazy, but the Pareto Principle, Zipf’s Law and the bell curve have convinced me that it’s a waste of time and money to get any more diversified. [Let me explain why that is the case.] Words: 396
So writes Kevin McElroy, Editor, Resource Prospector (www.wyattresearch.com) in edited excerpts from his original article* entitled One Law That Explains Nearly Everything.
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McElroy goes on to say in further edited excerpts:
The Pareto Principle – which states the “bell-curve” distribution in simple terms – asserts that all statistical phenomena follow the 80-20 rule. 80% of all the stock market’s gains come from 20% of stocks for instance or, more cynically 80% of everything is crap….Another version of this rule is called “Zipf’s Law” – which again is just restating the bell curve….
Okay, the investment implications should be clear. Most modern portfolio managers and market theorists urge their clients and investors to diversify. Unfortunately, that means most people actually seek out inevitably sub-par investments to round out their diversified portfolio.
The downside of being ill-diversified is that you might end up on the low side of the curve but, since most investments are found in that middle 20%, it’s likely that by diversifying, you’ll end up in the middle anyway.
Now, I can’t tell you how to invest but I can tell you that this type of distribution has convinced me to find a relatively small number of investments to put my investable income into. [Below is how my portfolio of assets is currently diversified:]
- 50% (a little over) is in physical gold and silver,
- a modest but growing 401(k),
- some shares of blue-chip dividend payers,
- a savings buffer in a regular old savings account, and
- a handful of speculative stocks.
It’s my belief that assets like gold and silver are likely to account for the bulk of the future price appreciation in the investment world. I expect gold and silver to be about twice as profitable as blue chip dividend payers, and I expect speculative stocks and bonds will be much further down the list.
You and I might disagree on the rankings, but it’s a mathematical certainty that very few assets will account for almost all of the gains in the coming years. It is [just] a question of which one. I’m casting my lot in with commodities – and I’m almost completely ignoring everything else for the time being.
Good investing, Kevin McElroy, Editor, Resource Prospector
Editor’s Note: The author’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article. Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor.
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