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No need to overdo diversification
Old 08-27-2011, 12:16 PM   #1
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No need to overdo diversification

Every once in a while I've wondered whether to add REITs or something else (not gold!) to further diversify. Based on the chart included with this Money magazine article (Walter Updegrave's "Ask the Expert" column from the August issue), I can stop wondering...
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Old 08-27-2011, 12:24 PM   #2
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So, you'll be doing it then? Improving return and cutting risk?
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Old 08-27-2011, 12:34 PM   #3
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I'll stick to Vanguard total market funds (U.S., international and bond) and call it a day.
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Old 08-27-2011, 02:20 PM   #4
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I'll stick to Vanguard total market funds (U.S., international and bond) and call it a day.
A fine plan. Taylor Larimore over at Bogleheads refers to such a portfolio as "The Majesty of SImplicity" Bogleheads :: View topic - Why I choose "The Majesty of Simplicity" for my s

Like Uncle Mick I've gotta have something to keep the hormones in check so I slice and dice. Gives me something to do and distracts me from all the other market noise...

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Old 08-27-2011, 03:08 PM   #5
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Some will disagree, but I've found that to be the case with junk bonds. Now if I were more into security analysis and could identify what looked like good buys in junk, that would be fine -- but from a broad asset class point of view, junk seems to mostly behave similarly to some combination of growth stocks and bonds, which are likely asset classes in one's AA already.
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Old 08-27-2011, 04:53 PM   #6
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I agree. Junk bonds don't add anything but risk that you can take with equity.
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Old 08-27-2011, 05:38 PM   #7
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One of the impacts of the increasingly liquid and global capital markets, is we are seeing increased correlation between all asset classes. Thus the benefits of diversification are decreasing. Now there are still some asset classes which are negatively correlated like gold that help, but I think we'll see the difference between small cap value, and large cap growth, and international vs domestic continue to shrink.
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Old 08-27-2011, 06:02 PM   #8
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Yes, my GLD and FXF have been a great counterweight during the recent stock declines.

However, there was a comment in this morning's WSJ that over the last 30 years, gold's correlation with the inflation rate was just 0.08. So you have to look at the big picture.

In general, I think you're right, clifp, but that's just for the near term. Longer term, I think we're more likely to see diversification become more useful again. At least I hope so.
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Old 08-27-2011, 08:07 PM   #9
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However, there was a comment in this morning's WSJ that over the last 30 years, gold's correlation with the inflation rate was just 0.08. So you have to look at the big picture.
Yeah, the old maxim is that gold is a play on expectations about inflation and about concerns about the local fiat currency. But more and more it's a play on economic uncertainty, regardless of the inflation rate or the change in the dollar. Look at the last five years -- compare inflation and the decline of the dollar to the price of gold, and it ain't even close.

Gold is more of a proxy on uncertainty these days. Look at the VIX and gold prices -- they have a pretty high correlation, much higher than usual.
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Old 08-27-2011, 09:24 PM   #10
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Why did I suspect this might end up becoming yet another discussion thread about gold?
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Old 08-27-2011, 10:06 PM   #11
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Why did I suspect this might end up becoming yet another discussion thread about gold?
Even after you had specifically excluded it

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Old 08-28-2011, 12:45 PM   #12
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I have been thinking a slice and dice approach might work better now with sector allocations instead of domestic/foreign in particular. Haven't checked it out yet, but it seems like you might catch more volitility that way.
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