They need to think differently about diversification—literally. Diversification most appropriately should be thought of in terms of choosing different exposures to risk. This means considering exposure to certain economic risks including expansion, recession, inflation, and deflation.
 
Traditional diversification can unwittingly overexpose investors to similar asset classes, even though different mutual fund companies and asset managers may be chosen.
 
Financial planners traditionally use historical correlations in designing asset allocation strategies.
 
But in 2008, the markets defied traditional approaches and completely ignored diversification theory.
 
Correlations can also change. During the 1980s and 1990s, Treasury bonds and US stocks tended to move in tandem. During the 2008-2009 credit crisis, bonds and stocks moved in opposite directions.
 
Being smart about diversification only makes sense. If the world is changing through globalization and the markets are being influenced by investor behavior and high-speed trading, it seems silly to think that traditional diversification is going to do the job.

This Website Is For Financial Professionals Only

Why Join Advisors4Advisors from Advisors4Advisors