401(k), Fiduciary, Quant

WHEN DIVERSIFICATION FAILS

If you believe in asset allocation, then this paper (attached) is for you. In their paper “When Diversification Fails,” T Rowe portfolio managers, Sébastien Page, CFA, and Robert A. Panariello, CFA, conclude that “One of the most vexing problems in investment management is that diversification seems to disappear when investors need it the most.” Their principal findings: 1) Asset classes are highly correlated in bear markets and less positively in bulls … just the opposite of what investors need 2) Correlations should not be used in asset allocation models unless you are evaluating downside risk 3) Utilize downside protection techniques rather than other asset classes for protection 4) Government bond duration is the only real source of diversification 5) The stock-bond relationship offers the most significant diversification benefit. This doesn’t mean giving up on strategic asset allocation. It just means you need an approach for bears also.

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