Adaptation made the human species what it is today, and it's adaptation that I believe offers a successful path through the most significant financial upheaval of our time.
Success, in all aspects of life, hinges upon the ability to adapt to changes in our surroundings.
As an anthropologist, I sought to preserve ancient life ways and knowledge precisely to sustain people's capacity to adapt. In the world of investing, changes are far easier to make, but they require thorough and careful analysis.
The great paradigm shift
Before housing turned horrific and the Bear Stearns cave collapsed, investors thrived for decades with a formula that spread bets across multiple investment goals, equity sectors, and market capitalizations … often wrapped in convenient formulaic bundles alongside bonds and cash. The conventional wisdom worked so well over the long term that employer-sponsored retirement accounts frequently limit fund options to variations of this basic approach.
Now that financial de-regulation, excessive leverage, unsavory lending practices, and an unscalable mountain of toxic derivatives have collided with equity growth in a manner reminiscent of the Great Depression, however, we are faced with a critical strategic question. In the wake of that gut-wrenching 54% decline in the Dow from peak to recent trough, do we stick with the investment strategies that worked so well during boom times, or adjust our approach to account for a different economic reality?
I am not advocating a particular course of action here, since investment strategies and allocations are highly personal considerations that must be tailored to each investor's goals, risk appetite, time horizon, etc. What I am suggesting is that the events of the past 15 months have fundamentally altered the investing landscape in a way that requires a fresh examination of strategies.
This is a process I advocated more than a year ago, and one which I feel remains timely today. One might even take a fresh look and decide that nothing needs tweaking. What matters, in my opinion, is the act of thinking it through.
At some point, it all boils down to your fundamental outlook on the state of the economy. If you believe that everything is under control as the Fed and Treasury juggle the largest fiscal interventions ever attempted by our species, that green shoots are preparing to blossom, and that the U.S. economy will be dialed back into growth before you can say re-allocation, then you may decide to change nothing. Those who share my expectation for significant devaluation of the U.S. dollar, and an unfortunately prolonged period of contraction for the U.S. economy, may crave an alternate approach.
Alongside adaptation, diversity is another key component of successful life on Earth. Biological diversity is important to the planet, cultural diversity keeps human life interesting, and diverse approaches to investing ensure that we'll always have people trying to prove why their way is best.
Within a given investment portfolio, diversification provides an important element of protection against being wrong with a particular investment thesis. While I advocate a critical re-examination of conventional approaches, I fully recognize the importance of diversification … whatever that word means for you. Interpretations of the word vary greatly; since diversification can refer to asset types, equity sectors or types, or even one's overall number of holdings.
Fellow Fool contributor Nick Kapur recently took aim at legendary investor Jim Rogers for cautioning against over-diversification. I believe that Jim merely intended to question cookie-cutter approaches to broad diversification during a period of economic distress.
Personally, I have opted to eschew conventional allocations in favor of more concentrated exposure to investments that offer protection from U.S. dollar devaluation … something Jim Rogers and I both consider inevitable.
While I hardly expect Fools to condone my degree of exposure to volatile precious metal miners like Agnico-Eagle Mines (NYSE: AEM ) and Pan American Silver (Nasdaq: PAAS ) , or bullion proxies like Central Fund of Canada (AMEX: CEF ) , I continue to suggest that the conventional 5% to 10% gold allocation is quite conservative given the mounting macroeconomic headwinds against the U.S. dollar.
Offering some diversification among dollar-defensive plays, the Jim Rogers-inspired Market Vectors RVE Hard Assets Producers (AMEX: HAP ) ETF features heavy weightings in energy and agriculture, including ExxonMobil (NYSE: XOM ) , Petroleo Brasileiro (NYSE: PBR ) , and fertilizer giant PotashCorp (NYSE: POT ) .
The bottom line
As an anthropologist, I know that various strategies can yield successful adaptations to the challenges of human life on Earth. Likewise, diverse paths can lead to investment success under any market conditions.
Conventional wisdom is dynamic, and I submit that this financial crisis is one of those events that can bring accelerated shifts. For example, the conventional wisdom (touted by Alan Greenspan) once held that housing prices would remain in a state of perpetual rise, seeing only variable growth rates but never experiencing a sustained decline. We now know that was pure fantasy. The wisdom within conventional wisdom can change over time, and so can successful investment strategies.