21 Oct

Psychology and why pink diamonds make great investments

Given the year it’s been, it’s beginning to look like Australia will almost fully be back to normal in terms of people movements in time for Christmas, with Victoria beginning to open up from COVID-19 related lockdowns, and even Queensland announcing a path out of the restrictions they currently have imposed.

And while that means many of us are no doubt looking forward to interstate flights, trips to see family and friends, or even just a simple restaurant meal, we will all still need to keep an eye on our portfolios, with the latest data around the world suggesting inflation rates are continuing to creep higher, while some volatility is starting to creep back into financial markets.

To that end, we came across a great article last week that ultimately dealt with investor psychology, and some of the pitfalls that come with managing your money in volatile markets.

From our perspective, this article, and the studies it quotes, reinforce why pink diamonds can make such great investments for long-term wealth builders today.

We explain in more detail below.

Psychology and why pink diamonds make great investments

Typically, when we talk about the investment case for pink diamonds, we focus on their market leading returns, and their genuine scarcity, which has of course only been magnified since the closure of the Argyle Diamond Mine last year.

While these of course will always remain pertinent factors, this week we came across an interesting study that solidified in our mind yet another reason why pink diamonds can make such great investments for astute individuals wanting to build wealth over the long-run.

And the study dealt with the differences that investors actually earn from a particular investment, versus the return that the market for that investment itself delivered.

For example, if the share market drops 10% in the first six months of the year, and then fully recovers before the year is over, then commentators will say the market was flat for the full year.

However, if as an individual investor you sold your shares after six months, when the market was down 10%, and never bought back in, then -10% will be the return you generated for the year, even though the market itself was flat.

Data out of the United States, which looked at the returns investors generated across a range of asset classes, found that investors almost always underperformed the asset class itself, and often by a large margin.

This can be seen in the table below, which shows the investor return, the total (market) return, and the gap between the two returns over a 10-year period.


The Gap by U.S. Category Group (10-Year Returns)

Chart titled "The Gap by U.S. Category Group (10-Year Returns)"

Source: Morningstar. Data as of Dec. 31, 2020. Excludes commodities category group. Gap numbers may not match differences in returns because of rounding.


As you can see, investors always underperform, with the largest gaps showing up in sector equity funds and what are deemed alternative assets (which are typically hedge funds and private equity vehicles), with investors in these asset classes performing circa 4% per annum worse than the market itself.

Another study by a US group called DALBAR found that the average US equity market investor underperformed the S&P 500 US stock market index by nearly 5% per annum over 30 years to the end of 2019, generating barely half the return the market itself did.

The key reason that this happens has to do with market timing. Simply put, whenever markets are volatile and are falling in value, investors tend to sell their assets, or at least part of them, and this is a major factor that costs them long-term returns.

Pink diamonds are a very useful asset class for investors wanting to avoid this pitfall for two key reasons.

The first reason is that pink diamonds themselves are not volatile, and over the last fifteen plus years have generated growth of approximately 600% in total, with this growth split between years they rise meaningfully, and other years where they are steadier in value.

The second reason is somewhat counterintuitive, but nevertheless remains true, which is that pink diamonds aren’t as liquid as shares, or other assets like foreign exchange.

This lower liquidity, the absence of volatility and strong long-term growth mean that astute investors are never tempted to panic sell pink diamonds, like some people in the stock market are, or sadly, like some homeowners are forced to, when or if they have trouble servicing a mortgage.

Combined, these attributes reinforce each other in a virtuous circle, and are additional factors that help make pink diamonds one of the best asset classes investors can turn to when looking to build wealth over the long-term!

Look out for this next week

At Australian Diamond Portfolio, we are always looking out for new ways to educate and inform our clients on the merits of investing in pink diamonds.

A key to that approach includes the provision of unique insights into the pink diamond market, looking at performance trends, which characteristics of pink diamonds are most in demand, and how investors can maximise the profits this asset class can generate.

Next week we will be releasing a first of its kind special pink diamond report exclusively to our clients, which will provide some never before seen insights based on the data we have collected on the thousands of pink diamonds we have worked with across our many years in business.

We can’t wait, and we hope you find it informative when it hits your inboxes.

As always, we hope you’ve enjoyed this week’s edition of “In the Loupe” and look forward to any questions or comments you may have.


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