Diversification Dangers

One of the things you learn in Investing 101 is the importance of diversification – in short, don’t put all your eggs in one basket. The thinking is that different asset classes tend to respond differently to changing economic circumstances. That’s why most portfolios contain a mixture of bonds and equities, the (somewhat wishful) thinking being that went equities go up bonds will go down. Larger portfolios will usually have some investment in commercial property. Here it’s usually considered better to invest in funds which directly invest in physical bricks and mortar than funds which invest in property companies since the latter are more closely correlated with the broader stockmarket.

With an even larger portfolio it’s pretty common to add hedge funds, private equity and commodities. Some people also add things such as forestry since they believe money can grown on trees. All this is done to increase diversification and (notionally) to decrease risk. That’s the theory.

In practice, I’ve been pretty badly burnt.

My hedge fund investment was badly hit by the Weavering Capital fraud.

One of my private equity investments, an Arch Cru fund, was spectacularly mismarketed and mismanaged.

With both of these it’s going to take several years before I get what is only a part of my investment back.

My venture into commercial property with Carpathian at one point was down 90%, and the fund is now gradually being wound up as the shopping centres and office blocks it owns are sold off.

And now I’ve been stung again: Castlestone Management, in two of whose commodity funds I have money invested was raided by the FSA and there followed a temporary suspension of trading the funds. As soon as the suspension was lifted I gave instructions to sell out of both these funds. I waited and waited but didn’t receive the proceeds. Yesterday Castlestone announced they were closing the business and that the funds would be frozen: no shares issued or sold. Goodness knows when I’ll see the money, and how much of my original investment I’ll get back.

Precisely how many times can lightening strike in the same place?

Forget diversification – I’ll be keeping my money under the mattress from now on.

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