Build your house of bricks

cartoon copyright 2004 by Patrick Hardin. used by permission.


We've written before about "deworsification" and included a scholarly graph in a previous post.

Here is an all-time classic cartoon which drives the point home perhaps more effectively than any graph you will find in a business-school text.

The wolf is advising the pigs against "putting it all into bricks." As we said in the earlier post on the subject:

"Diversification is an important concept in investment management. However, the marketing machine of Wall Street has taken an important investment concept and used it, in some cases, to convince people that they need to own more different products, and thereby more holdings, than they actually need."

In this cartoon, the wolf may well have an ulterior motive for recommending "sticks and straw as a hedge."

In real life, an advisor may not have an ulterior motive at all, but may be doing what he thinks is best, without even realizing that sticks and straw and all the other "hedges" created by the financial industry are not as good as simply sticking with the bricks.

Because advisors generally don't even pick stocks anymore, finding an ever-wider variety of instruments for clients is almost the typical advisor's automatic instinct (which we wrote about in several places, such as this post).

We reiterate the lesson that Rowe Price first observed in the early 1930s, and which he emphasized again four decades later in 1973: "most of the big fortunes of the country were made by men retaining ownership of successful business enterprises which continued to grow and prosper over a long period of years."

Financial market assets do not need to be as complicated as the financial industry makes them out to be. Reasonable diversification from solid stocks and solid bonds should form the majority of the foundation. When the big bad wolf is huffing and puffing, we'd still rather own good old-fashioned bricks.

For later posts dealing with this same topic, see also:

• "Invest like Mr. Howell" 05/18/2009.
  

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