Diversifying Your Portfolio

Speak to any money manager, stockbroker, or similar professional, and they will stress the need to diversify your portfolio. The logic is simple: Do not put all your proverbial eggs into one basket. Many people, including those with significant wealth, invested heavily in “surefire” investments only to suffer serious losses when the investment did not materialize as originally forecasted. As a consequence, many of those people who poured money into defeated investments found themselves filing for bankruptcy to ward off creditors.

Even the so-called safe investments are not safe. Government bonds, especially U.S. bonds, are considered safe. Provided that the issuing government is a “stable” government, there is the perception that investing in those bonds is wise. The reason, the theory goes, is that stable government bonds are not subject to the same issues that plague corporate bonds. Corporate bondholders face the instability of the economy and have a bankruptcy lifeline; in contrast, governments do not have bankruptcy lifelines and stable governments tend to have excess cash. Therefore, some people will place all of their investments in government bonds.

This reasoning is flawed. Government insolvency, though different than corporate insolvency, is real. What is more, placing all of your investments in one set of government bonds, e.g. all investments in U.S. bonds, is a mistake.  

Bond Dilemmas

Currently, the government of Venezuela and its former large money maker oil company have hit hard times. It is negotiating with bondholders about taking a “haircut,” which is a paycut to the face value of the bond. Currently, the bondholders are resisting and trying to cash out with a better deal. There is, however, a desperation move available to the government of Venezuela – devaluing the currency. At the moment, the Venezuelan Bolivar is approximately 0.000015 of 1 USD. With the strengthen of the dollar over the last few years with the weakening of the Bolivar, the Bolivar has lost value against the dollar.

In theory, the Venezuelan government can seek a loan from the IMF or a bailout from the United States government. The IMF has a strong currency policy, which means that Venezuela would not be able to devalue its currency if it takes a loan. Similarly, the U.S., if it provides a bailout to Venezuela, would likely insist on a strong currency, as well. Until then, Venezuela may devalue its currency even further just to make bond payments and then go seek an IMF loan and US bailout. At the time of bond repayment, bondholders would get back some or all of the amount owed but it would be with an almost worthless currency.

Those who invest in such bonds may find themselves in bankruptcy court, especially when they do not diversify. Relying on those bonds may lead to involuntary bankruptcy. A person close to retirement may have counted on bond income to make large purchases like a luxury home or penthouse in Miami. If he or she cannot make payments when due, creditors, depending on the circumstances, may place him or her in bankruptcy without consent. Another article will discuss involuntary bankruptcy.

In debt? Considering bankruptcy? Contact the debt relief firm of Melanie Tavare.