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Searching for a Custodian, and Questioning Diversification

By Mike Patton

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I am in the final stages of selecting a new custodian and I’m rethinking my long-time belief in diversification.

On the custodian front, I have spoken with six and have viewed a Web demo from four. There are pros and cons with each and a lot of different points to remember. To avoid confusion, I created a spreadsheet to keep track of their answers on various issues. These issues include the charge for buying and selling investments, reporting capabilities, the breadth of product offerings, etc. The charge for investing ranges from a low of $7 to a high of $35. Most of them, but surprisingly not all, include cost basis on their statements.

The extensiveness of products also differs. One firm has a total of 10,000 mutual funds, 2,200 with no transaction fees (NTF), while another has 16,000 with 10,000 NTF funds. Once I make my final selection, I’ll let you know who I’ve chosen and why. If you’d like to know more, send me an email and I’ll provide you with the details.

As for my recent thoughts on investing, when I started in the business, I was taught to diversify across several asset classes and rebalance periodically. Well, today I’m thinking that may not be the best policy. Fortunately, most of my clients have a maximum stock exposure of 35%, partly due to the market, but mostly due to the fact that I began to reduce their exposure six months ago. While that may be considered a good move in retrospect, I believe there must be a better way. Earlier this year, I was making money in commodities, oil, and a falling dollar. I did get out of oil and the dollar on time, but still maintain a small percentage in commodities. While I don’t consider myself a market timer, I do think there are some tactical moves one can make to help minimize the downside.

Recently, I downloaded the daily, weekly, and monthly data for the VIX and found the average is around 20. Now it’s over 60! It hasn’t been this high since its inception in January 1990. I’m in the process of analyzing the data to see if there’s a relationship between it and the market. We’ll see. If you have any approaches you’d like to share, I’d love to hear them.

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