Doomed dinosaurs and diversification

Change is a constant, in life and markets. Invest accordingly.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Scientists at Imperial College claim they’ve proven it really was an asteroid that wiped out the dinosaurs some 66 million years ago.
 
The most popular theory has long been that the so-called Chicxulub asteroid impact made the world unlivable for dinosaurs.
 
However some pointed to a coincident feisty volcanic period as a possible cause.
 
Scientists had in effect two suspects at the scene of the crime.
 
Both theories presume sunlight was blocked out for years – either from the debris and gases kicked up by the equivalent of a car prang from outer space, or by volcanoes churning out particles and gases – and that this plunged Earth into a decades-long winter.

Big Bash Theory

However the Imperial researchers (working with others from the University of Bristol and UCL) claim their new model proves the asteroid theory is right.
 
They concluded this by modelling not just the climactic impact of both scenarios, but also factoring in the living habits and nutritional requirements of dinosaurs.
 
Their model demonstrated that, either way, you wouldn’t want to be a dinosaur 66 million years ago.
 
However the model found that only the asteroid impact produced worldwide conditions sufficiently dinosaur-unfriendly to wipe them all out.
 
Volcanic activity was not found to be sufficient to disrupt all ecosystems. Some dinosaurs would have survived, but the record suggests they didn’t.

Life – and the stock market – finds a way

“Hold up!” you cry. “I’m glad I’ll no longer be kept awake at night by the asteroid impact versus volcanism debate – but isn’t this an investing newsletter?”
 
Absolutely! I’m such an investing nerd that I can’t even read a story about the demise of my childhood faves without thinking about the stock market.
 
How many times have we heard this or that market-smashing event described as the equivalent of an asteroid screaming unseen from the void?
 
Yet shares – like life on Earth – inevitably find a way to grow back.
 
Unless stock markets are completely wiped out by revolution and nationalisation – the equivalent of the Earth running into the sun, perhaps – history shows that economies and their listed proxies eventually recover their losses.
 
True, the revolutions that led to Soviet Russia and Communist China did destroy their stock markets. Investors in those countries were the equivalent of dinosaurs marooned in a perpetual winter.
 
But elsewhere, even investors hit hard by the likes of World War 1 and World War 2 made back their losses, eventually. Markets survived.

Diversify or die

The tenacity of life – even if you throw volcanic eruptions and massive rocks from space at it – is one parallel I see with shareholder capitalism and investing.
 
The other lesson is diversification.
 
Dinosaurs couldn’t live in the post-Chicxulub era. But some form of life clearly did go on – otherwise I wouldn’t be writing to you and you wouldn’t be reading!
 
The dinosaur branch of life’s family tree was perfected for the status quo. While the Earth was humid, swampy, and covered with vegetation, dinosaurs ruled.
 
But when things went dark, it was small, scurrying and tenacious animals that ran over the bones of their previous overlords. Mammals were the also-rans in the dinosaur world, but they prospered and evolved after the asteroid strike.
 
The equivalent I see is concentration versus diversification in our portfolios.
 
During my 20 years’ involvement with The Motley Fool, I’ve watched numerous waves of investors put all their money into very narrow slices of the market.
 
The tech boom at the turn of the century, oil exploration and production outfits a decade or so ago, gold miners, and recently high-growth ‘platforms’ in the US.
 
When their chosen sector is thriving, diversification looks like a loser’s game.
 
But today’s market mania is tomorrow’s stock market slump.
 
It’s very rare for the stock market to be entirely wiped out, as I said above.
 
But sector-specific asteroid strikes are all-too common, whether due to changing economic circumstances or simply the bursting of a bubble.
 
Many dotcom investors lost 90% or more of their portfolio’s value when the market burst. That sort of crash can finish you as an investor.
 
But if you only have, say, 25% of your portfolio in the darlings of the day when they’re hit, then three-quarters of your investments can cushion your losses.

There’s more to life than shares

Finally, we should consider other asset classes besides shares.
 
Wipeouts are rare for the entire stock market, as we’ve discussed.
 
But 20-50% declines in equities – analogous to the hostile environment created by volcanic disruption – come along pretty often.
 
Even the dinosaur line was diversified enough that some of them would have survived if they’d only faced a short, sharp shock from volcanic activity.
 
Indeed the researchers found life would have been boosted by volcanic eruption. In time the sun-blocking particles would have fallen to leave clear skies. Carbon dioxide would have remained at an elevated level, however, fuelling enhanced plant growth worldwide.
 
Your portfolio should similarly be able to withstand financial seismic activity.
 
Have everything in shares, and you’ve no choice but to wait for the slow climb from the bottom to bring your portfolio back to life. That’s assuming you don’t sell at the nadir of a market crash because you think it’s left investors for dead.
 
But invest some of your net worth into other assets – cash, bonds, gold, property, and so on – and you might see green shoots in your portfolio even as your shares are in what looks like a death spiral.
 
Life survived on earth because it was diversified against unthinkable shocks.

The dinosaurs didn’t because they weren’t.
 
Don’t invest like a dinosaur!

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

More on Investing Articles

Investing Articles

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »