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February 2010 - Posts

Securitization vs. portfolio diversification

 

 

mosaique de trucages.JPGCurrent investments seem to be interested in securitization rather than in small business financing. Bank lending for the benefit of actual business has shifted to ever more complex strategies for paper issuance. Portfolios are not broadly diversified due to this over-reliance on securitization that is seen as synonym of profitability. Neglecting tangible production of new real wealth is the opportunity cost of leaving great project ideas on the planning stage. 

Portfolio Diversification is a distribution in a set or portfolio of different investments in order to mitigate their overall risk. Securitization refers to the trend of commercial banks in the international financial market to replace their activity of business loans and credits for the issuance and placement of securities and the organization, control, management and consulting of new issuance from businesses.

 

trazos de maracay.JPGThis phenomenon may partly explain the entrenchment of the current financial crisis. Inefficient companies that benefited from bank lending during their early years now continue to benefit through the new complex financial structures. The efficient startup companies from today, however, have little financing available. The predominant risk models assume they are bound to fail because they are undecapitalized startups, suggesting an unfortunate self-fulfilling prophecy caused by a vicious circle of risk aversion. 

I invite my readers to design strategies to test this hypothesis that an effective, profitable portfolio diversification should include a healthy, significant percentage of old fashioned investment in addition to the trendy securitization.

Top: Mosaïque de trucages by RRivero 2010
Bottom: Trazos de Maracay by RRivero 1997