August 08, 2023

View online | Sign up

Good day. Last year, the classic 60/40 portfolio consisting of 60% stocks and 40% bonds was declared dead during dark times for both stocks and bonds, incurring a 16% loss on the year. Just 8 months later, diversification is back. Can you guess what the 60/40 has returned through just 7 months in 2023? a. 8.1% b. 10.11% c. 12.20%. Follow the wave 🌊 below for the answer.

Here are the topics for today:

Diversification Mistakes to Avoid
Your Mortgage Just Got Sold — Need to do Anything?
Changes Coming to How We Send Money

INVESTING

Diversification Mistakes to Avoid

As stoic philosopher, Seneca once said, "Excess in anything becomes a fault."

Is that always true though? Not particularly. Sometimes honing in on a single focus can yield great results, that's why the modern job market is so specialized. Other times though, being too narrow can leave you vulnerable, meaning you might need to find a middle ground.

Suffice it to say, concentration can be both the main creator and destroyer of wealth, so where's the right balance?

What to watch for

Over-diversifying: Too much and too little — both constitute excess in one way or another. When taken to an extreme, overdoing your diversifying can end up diluting your gains over the long run as you run the risk of spreading your allocations too thinly.
Overlapping correlations: It's easy to obtain the illusion of diversity by owning a few different broad-market index funds. For example, an investor might allocate their equity portion to 50% $SPY (S&P 500), 30% $QQQ (Nasdaq), and 20% $DIA (Dow Jones), and think they're diversified. However, 82% of QQQ's holdings are also in the $SPY.
Not rebalancing: As time goes on, your portfolio will inevitably get a bit out of whack as some assets outperform others. As a result, what may have once been a perfectly sliced-up portfolio has now shifted more in favor of your best-performing holdings, leaving you more exposed to their risks.
Focusing on one asset class: You might be diversified when it comes to stocks, but what portion of your portfolio is allocated to bonds, alternatives, and income-generating assets? The principle of diversification spans all asset classes.
Diversifying just for the sake of it, or, "diworsification" as Charlie Munger called it. Munger mentions that he believes diversification should not be taught as a necessity when it comes to investing in common stocks. "That is an insane idea. It's not that easy to have a vast plethora of good opportunities that are easily identified. And if you've only got three, I'd rather be in my best ideas instead of my worst."

Take this related lesson and earn 🟡 Dibs:

Rebalancing Your Portfolio

Investing Basics

8 mins

HOUSING

Your Mortgage Just Got Sold — Need to do Anything?

Economics and finance are just one big game of making things more complex than they really are. This isn't malicious or intentional, it's just that in interwoven economies, every action has an equal and opposite reaction, and equal opportunities to make a profit as well. Yes, the laws of physics apply to money too.

Mortgages are no different, and are actually a prime example of how everything in an economy is interconnected. A first-time homebuyer could have a perfectly reasonable assumption that when you get a mortgage, you simply owe money to the bank that made the loan. Seems pretty straightforward, right?

Yes, but no. Mortgage lenders package and resell mortgages to buyers in the form of "mortgage-backed securities" (MBS) and as sketchy as it may sound, this is an entirely normal practice.

Do you need to do anything in this situation? Sometimes.

Make sure it's legit: If you receive a letter from your supposed new loan servicer, but not from your previous lender, this should raise some red flags. It's not unheard of for scammers to prey on the mortgage resale market in hopes of an arbitrage opportunity, so the first thing you should do is confirm the validity of your mortgage transfer.
Review the details: Assuming everything is above board, you should then review the fine print — things like payment information, contact details, terms and conditions like your rate, escrow amounts for property taxes, insurance, and ultimately your monthly payment.
Confirm payment details: The last thing you'd want is a missed mortgage payment due to run-of-the-mill confusion. Reach out to your new and/or previous lender to confirm your new payment details and ensure that you can get it to the right account on time. Law requires that lenders give borrowers a 60-day grace period in the event of a transfer, but it's still pertinent to make sure everything is on the level.
Know that there's not much you can do about it, and it doesn't impact you that much at all. Lenders have the right to sell your mortgage, and for the most part, it's a pretty harmless practice with immaterial implications for you as the borrower.

MONEY TIP

Changes Coming to How We Send Money

When it comes to America's banking infrastructure, we're pretty used to things being relatively "slow" in terms of sending and receiving money. Whether it's a paycheck, bill payments, or other common transfers, the general norm has been to expect a several business day-long wait.

Why? Because the current train tracks of the banking system are designed that way, transactions have to jump through several hoops and validators to get to their final destination.

But luckily, this is changing. Last month the Federal Reserve announced the formal launching of its new FedNow system, a new, streamlined process that should allow transfers to be made readily available around the clock, even on weekends.

Worth noting

Adoption: Transactors only reap the benefits of this new system if both the sending and receiving institutions involved have adopted the system, and so far, just about 35 banks have done so.
Distinction: This update is not a peer-to-peer processing framework like that of Zelle, Paypal, or even Canada's Interac system. Rather, the FedNow iteration is a system meant to operate entirely in the background — it's something bankers might interface with, but not you.
The drawdowns: Instant payments aren't exactly a bank's best friend. They're missing out on some interest income that would've otherwise been accrued had they held those funds longer and also slightly upping the risk of a potential bank runs as it increases deposit flight through easy access.

🌊 BY THE WAY

by the way

📊 Answer: 12.20%. On pace for a 20% plus year, it's safe to say that the 60/40 is back for now (Portfolios Lab)
🐦 Say goodbye to Twitter's infamous bird logo (Axios)
👋 ICYMI. Building credit for newbies (Finny)
🏀 Phoenix hoops teams ditch their local broadcasters (Fortune)
📚 Finny lesson of the day. A mortgage is perhaps the most expensive, and most important debt most of us will ever take on. Needless to say, it pays to know your loan well:

Mortgage Options

Housing

6 mins

How did you like today's newsletter? (Please vote only once.)

🔥 Great, enjoyed it - 😐 Okay, but you can do better - 👎 Not interesting

Advisory services are offered through Origin Financial, a Registered Investment Adviser registered with the U.S. Securities and Exchange Commission. The status of registration as an Investment Adviser does not imply a certain level of skill or training.

The information contained herein should in no way be construed or interpreted as a solicitation to sell or offer to sell advisory services. All content is for information purposes only.

It is not intended to provide any tax or legal advice or provide the basis for any financial decisions. Nor, is it intended to be a projection of current or future performance or indication of future results.