Diverse Dollars

Back in ’98 I published a book called “What Did My Broker Say?”   In it I tried to illustrate how good portfolio construction required proper diversification.  As an example I said buying stock in Ford, General Motors, and Chrysler would not truly diversify an investor since all three were in the same industry and would likely tend to move up or down in price together.

Try doing that today, just a scant 12 years later.  Ford is still okay although a quick check of its price shows you would have lost about half your money over that period, even after adjusting for any dividends and splits.  The same can’t be said of the other two.  Chrysler was subsequently bought by a German car company, then spun off to a private U.S. based group of investors named Cerberus in 2007.  When the American economy began to head south and our government began questioning the company’s viability, Cerberus allowed the company to go into bankruptcy.  General Motors also went bankrupt at that time and has now been reorganized as a new company owned in the majority by the U.S. Treasury.  I would say this brief history certainly underlines the importance of proper diversification.

Lately China, along with some other nations, has expressed their doubts about the ultimate strength of U.S. dollars given our growing deficits.  How does anyone diversify against his own nation’s currency, the only acceptable medium of exchange he can use to pay taxes, cash payroll checks, and buy groceries?  The price of gold does seem to be climbing as investors around the world begin to see it as a form of currency in its own right.  Can precious metals ever prove to be the answer in a world economy as large as complex as ours?