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Wednesday, July 23rd, 2014


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Portfolio diversification effective in down market

Investors have had to deal with paltry returns over the last few years, but diversification is still an effective tool. Diversification means combining different assets that do not correlate with each other, meaning they do not move together. Investors have had to deal with paltry returns over the last few years, but diversification is still an effective tool. Diversification means combining different assets that do not correlate with each other, meaning they do not move together.

USA Today reports that the Standard & Poor's 500 index yielded a meager 1.4 percent between January 1, 2011 and November 30, 2011, according to data provided by money management firm IFA.com. In contrast, an investor who created a portfolio including other assets, such as a 40 percent allocation to bonds, yielded 5.7 percent during the same time frame.

Equities have been particularly hard-hit since the Dow peaked in July of 2007. The media outlet reports that an investor who bought the best stocks of 2007 and held onto them during the ensuing recession would have a portfolio down 60 percent.

Although asset classes have a higher correlation in a bear market than in a bull market, diversification can provide benefits regardless of economic conditions. Young investors might benefit from researching this investment technique when participating in long-term planning.  

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One Response to Portfolio diversification effective in down market

  1. Mike Dever says:

    I certainly agree. Portfolio diversification is the one true “Free Lunch” in investing and investors should of course include non-U.S. stocks in their portfolio. But this focus on stocks and bond does not provide true portfolio diversification. Unfortunately, the traditional method taught is incorrect. The simple focus on stocks and bonds will not perform in the future as it has in the past. That is because bonds will not yield the high single digit returns over the next decade that they did over the past 30 years and stocks will produce substantially lower returns as well. The math is simple: Bond yields were in the double digits when the great bond bull market started. today they are at less than 1% (5 year U.S. governments). Stocks had a dividend yield of 4% and now that is at 2%. And the P/E ratio was at 9 and now it is at 15.

    There are solutions and a way to produce true portfolio diversification. I write about these in my book and am pleased to provide a complimentary link to the chapter on international investing:
    http://bit.ly/vqunLV
    and also to the final chapter that displays the benefits of true portfolio diversification:
    http://bit.ly/vxDo6v

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