Will diversifying your investments help you now?
So what is this popular investment approach?
You've heard the answer before: Diversification.
You probably know that the purpose of diversification is to spread risk across asset classes. The assumption is that if one asset goes down, the others will be stable or perhaps even move up.
But what if we're in a time when an "all the same market" scenario is unfolding in the financial world? What if the following description proves accurate:
"In recent years the financial markets have turned roughly together. Although to date they have not topped and bottomed on precisely the same day or even the same month (that would be too easy), their correspondence is getting tighter and tighter." ~ Elliott Wave Theorist, May 2011
Please take a look at the chart below.
As noted in the quote above, not all financial markets are trending together exactly. Yet the chart speaks for itself: the correlation is becoming increasingly visible.
In the stocks category alone, diversifying between sectors can leave your portfolio beaten and tattered:
"More than ever on record, individual stocks in the Standard & Poor's 500 Index are moving in unison...
"'It's not just stocks. It's actually all asset classes,' said [Andrew] Lo, who is...the chairman and chief investment strategist of a hedge fund. 'The U.S. dollar relative to other currencies, gold, oil and hedge fund returns have now all become very highly correlated.'" ~ Huffingtonpost, (8/24)
No other investment approach has been more widely preached than "diversification." It's important to dispel the myth of diversification -- especially now.
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This article was syndicated by Elliott Wave International and was originally published under the headline Why This Popular Investment Strategy Will Not Save Your Portfolio. EWI is the world's largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.
