A Whole New Paradigm?

TraderMark has a post up with a couple of very important one-liners.

First;

RiverSource Investments LLC and Harris Private Bank are telling clients that diversification strategies to smooth out returns won’t work. They suggest shifting money to cash and bonds on concern gains will evaporate.

And;

There’s nowhere to hide,” said Joseph Mezrich, the head of quantitative research at the U.S. brokerage unit of Nomura Holdings Inc. in New York. “The problem of correlations is growing, and I don’t think it goes away.

 

One of the great frustrations of 2008 was that diversification supposedly did not work; correlations between asset classes that are usually low generally went way up. The reason I say ‘supposedly’ is because many people think that the failed diversification of 2008 is permanent going forward. We have learned firsthand that in a crisis correlations do rise. Not every bear market is a crisis however. This bear will end, maybe it already has, and then there will be another bear market a few years later and there may or may not be a crisis to accompany that bear market.

As opposed to a blanket statement one way or another it makes sense to analyze the current event and decide whether in the current event diversification will work or not. It is not logical to assume either extreme of diversification will always work or diversification will never work can be correct for all times.

It makes sense to build a portfolio with different asset classes in the hopes of always having at least one thing that will go up in a decline. And that does work most of the time. However this type or portfolio structure still requires ongoing forward looking analysis of all the asset classes. Personally I don’t like the idea of zero exposure to an asset class in case my forward looking analysis turns out to be incorrect, this happens to everyone BTW, but reducing exposure if things don’t look good in the intermediate term is very reasonable even if all you do is increase the cash position. When the intermediate term outlook for everything looks lousy there is nothing wrong with building a large cash position.

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