Diversification and rebalancing are keys to long-term returns.(Written by Gregg S. Fisher, CFA, CFP, is president and chief investment officer of Gerstein Fisher)
Too often investors scrutinize their portfolio statements like tense parents reading a child’s report card. They glaze over the A's and B-pluses and, with furrowed brows, hone in on that errant C.
In investing focusing too narrowly on a problem area often misses the big-picture story. It may seem counterintuitive, but investments that have underperformed their benchmarks or other holdings can actually improve the total risk/return profile over the long haul. This is not a new phenomenon, but it is one that investors routinely ignore. It’s called the diversification effect. Remember diversification?
Diversification Gets a Bad Rap
In the wake of the wild volatility in financial markets over the past few years, many investors have come to view with a jaundiced eye the notion that there is safety in spreading your bets. This reaction is understandable, even if misplaced. True, diversification within equities, as shown in Table 1 below, does not appear to have helped investors much over the past three years.....
To see the full article, visit the webpage, http://www.forbes.com/2010/03/30/portfolio-diversification-personal-finance-asset-allocation.html.
I agree with the way of diversifying the investments based on correlations. Even though the portfolio focused on high expected returns with postive correlations might look more attractive than others, they are more risky and vulnerable to the unpredictable economic condition. The diversification of the portfolio focusing on the ones with less correlations will make the investments solid, less risky and generate stable returns in the long tern.
ReplyDelete