Stay Sane This Year With 'True Diversification'

The Weekend Edition is pulled from the daily Stansberry Digest.

Believe it or not, at the end of 2019, I didn't think the world could get any weirder...

You might recall the $120,000 banana on display at an art exhibit in Miami... or the top-of-the-line Mac Pro desktop computer that cost $52,000.

Then, 2020 happened – and life got much, much weirder...

COVID-19... the total disappearance of Clorox wipes from store shelves everywhere... the deepest economic contraction since the Great Depression... violence in the streets of major U.S. cities... people standing in line for hours to buy guns and ammo... and much more.

And of course, the financial markets reflected the chaos throughout the year as well.

The benchmark S&P 500 Index dropped 34% in little more than a month... U.S. Treasurys traded at – and still trade near – record-low yields (which also means record-high prices)... oil prices went negative... gold and silver reached new heights... and bitcoin has more than doubled this year.

Years like 2020 are exactly why I repeat the same mantra often...

Prepare, don't predict.

It's a point that can't be made often enough as long as stocks are bumping against their highest valuations in history. And as we end the first week of 2021, the situation is even worse...

Stocks are riskier right now than they've ever been before...

Our friend Jason Goepfert at sees it. He recently published "12 Charts for a Perma-Bear Christmas" on Twitter, showing...

  • The most confident "Dumb Money" in history (a SentimenTrader indicator of speculative excess)
  • The highest market value relative to economic output
  • Nearly the highest concentration of wealth invested in stocks ever
  • Massive inflows to exchange-traded funds ("ETFs," a favorite speculative vehicle)
  • A rush into equities by overseas investors
  • Mutual funds holding their lowest cash reserves in history
  • Active investment managers (hedge funds) using more leverage than any time in history
  • The most speculative options market in at least 20 years
  • A drop in hedging activity
  • The biggest concentration of indicators showing excesses in more than 15 years
  • Few souls are starting to price in a potential crash
  • Corporate insiders near record-low levels of buying

Now, on their own, there's no reason why any one or two of these data points means that trouble lies ahead for equity investors. But all of them together? That's different... That's one way that you can identify the biggest financial bubble in history.

As my colleague Steve has observed, financial bubbles usually culminate in a massive "Melt Up"...

That's when the markets soar straight up, faster than almost anyone could ever imagine.

But then, on the flip side, it's pretty normal for crashes and bear markets to follow Melt Ups.

Given the excesses that Goepfert noted in his "Perma-Bear Christmas" series, we could see Steve's Melt Up play out in full force in 2021. I'm talking about the S&P 500 soaring straight up in a very short time frame – maybe 10% to 20% beyond its latest all-time highs in a matter of months... or possibly even higher!

If that happens, though, I believe the odds will then tilt to the other extreme... with the likelihood of a fast correction – perhaps even in one day – of at least 15% to 20% (and maybe even the beginning of a one- to three-year bear market).

What happens after that is anybody's guess.

In fact, even those two scenarios are little more than a guess. Sure, I'm looking at data and I know the pricing history of stocks, bonds, and other assets. And I also know that market crashes happen a lot more often than most people realize...

But as I've emphasized time and again (including today)... nobody knows the future.

What if the stock market goes sideways this year? It could happen... Anything could happen. We can't predict what stock prices will do.

And I'm acutely aware that by anticipating market extremes to get even more extreme, I could very well be playing right into the hands of a manic-depressive market that loves to deceive and surprise us all.

But I refuse to be unprepared for the widest possible range of outcomes for which I can prepare my wealth, myself, and my family.

Another way of thinking about my mantra is, "Since you can't possibly hope to predict, you had better learn how to prepare."

That's why I keep singing the "true diversification" song for everyone who will listen...

You can prepare for a wide range of outcomes as long as you're holding the one asset that most truly diversifies you...


There is no substitute for cash. It's like oxygen. You need it to live, but you never think about it until you can't get enough of it.

Don't let that happen to you in the stock market. Make sure you have plenty of cash available to take advantage of market volatility when it inevitably rears its ugly head.

The basic components of my recommended "truly diversified" portfolio are...

  • Stocks and bonds, a stake in humanity's relentless progress
  • Plenty of cash (20% of your investable liquid assets)
  • Stores of value like gold, silver, and bitcoin
  • Whatever asset class you understand well (real estate, collectibles, etc.)
  • For now, put options on big equity indexes

I call this "true" diversification because if all you own are financial assets, you're not truly diversified... no matter how many different stocks and bonds you own. You're only truly diversified if your portfolio includes assets inside and outside the currency regime.

Stocks, bonds, and cash are inside the currency regime. Gold, silver, and bitcoin are outside of it.

Remember, the purpose of this truly diversified portfolio is not to predict that stocks, bonds, gold, silver, and bitcoin will all go up together forever. It's quite the opposite...

The purpose of true diversification is to own assets that tend to do well at different times...

Cash protects you from big, short-term drawdowns that scare the daylights out of most investors and cause your other holdings to fall in value. Even gold, silver, and bitcoin fall when investors panic (all three sold off earlier this year as stocks were crushed during the initial COVID-19 meltdown). There is simply no substitute for having a big slug of cash after a big downturn. Anybody who had plenty of cash in late March knows what I mean.

Gold and silver help you preserve purchasing power over the long term. They've been excellent stores of value for thousands of years.

Bitcoin is a burgeoning store of value that's rapidly gaining widespread acceptance. And if it continues to grow as I expect, you could make 50 to 100 times your money.

Stocks and bonds are an essential stake in the relentless upward trajectory of humanity. More people enjoy a higher standard of living than ever before... And stocks are the way to invest in the trend's endless (but occasionally volatile) march onward and upward.

If you practice true diversification, I believe you'll come through 2021 and the next several years having preserved and grown your wealth with less volatility and sheer anguish than investors who don't do it.

Don't misunderstand me, though... Preparation is no cure-all.

Preparation is inherently complicating. By preparing for a wide range of outcomes, you add to the list of outcomes for which to prepare... You must now prepare for the possibility that your preparations are inadequate to protect you from the anticipated outcome.

Is your head spinning yet?

Preparing for big risks to be realized in financial markets introduces new sources of risk.

But again, the alternative to preparing for a wide range of outcomes is to not be prepared. And I'm sure you'd rather be an investor who's ready when chaos erupts than one who isn't.

Good investing,

Dan Ferris

Editor's note: The Melt Up roared through 2020... But we're now in the final innings of this bull run. If you hold any money in the stock market today, Steve is urging you to follow his No. 1 step to keep your Melt Up gains protected no matter what happens from here... Click here to learn more.