Diversification: It's Not Too Late To Do The Right Thing

Summary

• Amid an unwinding stock market, should investors step out of the way or buy shares on the cheap?
• I don't like the "coin toss approach" of being either in or out of the markets and continue to prefer asset class diversification.
• I believe there's no better investment strategy today than to be prepared for whatever comes our way.

As I look at the equity markets unwind on Monday and at investors' reaction to the carnage, I see two lines of thought surfacing.

Some market participants believe that the COVID-19 is "the pin that came along to pop a debt and asset bubble of historic proportions." Others think that "the biggest profits are made by taking the opposite side of the most extreme overreactions," and that now is the time to "capitalize upon numerous compelling buying opportunities." (Both arguments were taken from a recently-published Seeking Alpha article.)

Credit: Hedgeye

I think that both views above could ultimately prove to be right. The global economy had been showing meaningful signs of distress since 2018 at least, and the virus outbreak served as a very firm shove to throw the markets off balance very quickly. The global recession and asset price deflation that have been avoided by monetary and fiscal easing for the past few years may now be inevitable.

At the same time, shares of companies that only a few weeks ago were considered to be in good footing have been falling off a cliff. For example: Delta Air Lines (DAL), a best-of-breed name in the airline space, has been down 30% since the stock's mid-January peak. Why not buy DAL at three-year lows, take advantage of rock-bottom crude oil prices and wait until the dust settles?

The coin toss approach is not good enough

The problem that I have with either (1) hunkering down for a long-lasting correction or (2) buying battered shares on the dip now is that one of the approaches is likely to be proven wrong. If you ask me, I'm not a big fan of relying on a coin toss to determine the success of my investment strategy.

Regarding the first plan above, think about the

Analyst’s Disclosure:I am/we are long LTPZ. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.