The Investor's Manifesto: Preparing for Prosperity, Armageddon, and Everything in Between

CHAPTER 3

The Nature of the Portfolio

Because we cannot predict the future, we diversify.

—Paul Samuelson¹

Picture, if you can, a Japanese investor nearing retirement in December 1989. The Land of the Rising Sun is ascendant; appraisers value the land surrounding the Imperial Palace at more than all the real estate in California, and Japanese businessmen are gobbling up American companies and land like potato chips. Japanese manufacturers are devastating their European and American competitors with an endless supply of attractively priced cars and consumer goods. Within two decades, Toyota will sell as many vehicles in the United States as General Motors does.

Not surprisingly, Japanese equities have provided Japanese retirees with more than agreeable returns. In the preceding 20 years, $1 invested in the stocks trading in Tokyo grew to $57.23. Our hypothetical Japanese retiree should have looked forward to a retirement lush with family time, a Hawaiian condo, and all the material goods his heart could desire.

His story, unfortunately, does not end happily. Over the following 19 years, between 1990 and 2008, $1 invested in Japanese stocks fell in value to less than 60 cents, even with dividends reinvested. Since Japanese stocks were so ludicrously overvalued in 1989, there really were not many dividends anyway.

Unless you diversify, you risk suffering the fate of post-1989 Japanese investors.

Consequently, his portfolio did not survive as long as he did. He withdrew what seemed ...