Just Plain Bad Advice - Nothing Always Works All of the Time

I was reading an investment periodical that I received at my office. It was from a real estate mutual fund company. The title of the article was "The Importance of Remaining Invested." They were talking about the importance of buying and holding investments for the long-term.

The article is talking about helping your clients feel comfortable with the risk in their portfolio. If your client doesn't feel comfortable with the traditional stock/bond/cash portfolio, consider adding real estate to make it more diversified. The article was making the point that by adding real estate to the mix "the correlation between real estate and stocks, bonds, and cash may help manage the volatility in a portfolio." In other words, reduce the risk.

That might have worked decades ago. Today, that is bad advice. The average year to date return of real estate funds is -7.25%. The fund that this article promotes is down over -9% year to date. (through 7/25/07)

The problem is that a stock is a stock whether it is international, domestic, or real estate. We are in an environment that traditional diversification might just not work. Stocks have all classifications are carrying the same type of risk today.

The flaw in this line of thinking is that traditional diversification and buy and hold ALWAYS work. Just remember that nothing always works. That is why you have to think differently when investing.