The Poor Investor – Investigatory Value Investing

"Faber est suae quisque fortunae" -Appius Claudius Caecus

Is Diversifying Your Portfolio Harder Now?

I was reading an article from Fidelity called “Where to Look for Returns” and came across an interesting table I wanted to share with all of you:

For those of you looking to diversify your portfolios this appears to be a lot more difficult nowadays.  It also appears that these high correlations are not going to change anytime in the near future.  Furthermore, it is my belief that return enhancement via the effects of rebalancing (great article about rebalancing) may be reduced due to these high correlations.

Note: Personally, I use TIPS for portfolio diversification since historically (and currently) they still have the lowest correlation to equities.

—-Written by: The Poor Investor

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3 responses to “Is Diversifying Your Portfolio Harder Now?

  1. Mike Dever April 15, 2012 at 3:12 pm

    Diversification only appears to be more difficult than in the past if a person limits their portfolio options to long-only positions in the traditional “asset classes.” In fact true portfolio diversification is impossible to achieve without understanding and diversifying across the specific “return drivers” that underlie specific “trading strategies.”

    I discuss this throughout my book “Jackass Investing: Don’t do it. Profit from it.” (#1 Amazon Kindle best-seller in the mutual fund category).
    As you might have guessed from both the book’s title and my opening paragraph, my approach to diversification is quite different from conventional investment wisdom. One concept I think you’ll find most interesting is in that I replace asset classes with “return drivers” and “trading strategies” (as I point out in the book, asset classes are simply long-only trading strategies that do not attempt to disaggregate their many separate return drivers). Once viewed in this fashion it is easy to create a truly diversified portfolio, rather than one constrained by the shackles of asset classes.

    I’m pleased to provide you with a complimentary link to the final chapter of the book, where I present the benefits (greater returns & less risk) of a truly diversified portfolio: http://bit.ly/vxDo6v.

    • thepoorinvestor April 15, 2012 at 5:48 pm

      I do appreciate dissenting opinions, and when I get a chance I will check out your website, however, in some portfolios individuals may be limited to “traditional asset classes.” For instance, in most 401K plans provided by employers many are limited to only a handful of mutual funds which are separated into classes. In these instances, employees may not have any other options other than the above-listed asset classes.

      • Mike Dever April 18, 2012 at 3:35 pm

        I agree. That is, unfortunately, a big problem with virtually all 401(k) plans. They don’t allow people to truly diversify.

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