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By Lee McGowan, About.com Guide to Mutual Funds

Diversification Still Works

Thursday July 2, 2009
Diversification between various asset classes is a basic rule adhered to by many mutual fund investors. As of late, I have been hearing more and more about the problems with diversification. The naysayers say diversification no longer works.

Simply put -- the cynics are wrong. We should all know by now that if you own U.S. equities and international equities, small cap and large cap, and growth and value, that they are not negatively correlated -- there is systematic risk. In other words, if you buy a US mutual fund and an international mutual fund, you shouldn’t expect that if the US market goes south then the international market will only go north. That’s not the point of diversification amongst various equity asset classes/styles.

A popular saying with respect to investing is: “All ships rise with a rising tide.” This was not spawned by the markets of 2008 when it was difficult to find shelter within any equity investment. We need to get back to reality. The point is that diversification is a long-term investment strategy. There is systematic risk of equity investing (ships, rising, tide). William Bernstein wrote a nice piece on the subject for CNN Money in April.

Comments

July 3, 2009 at 1:05 pm
(1) http://www.simplestockinvesting.com says:

I agree. Globalization has made diversification less effective, but I don’t think it has up to the point of making it useless. The US, Europe and Asia, may be sailing more closely to each other now, but they are still different ships. The same can be said of distinct companies, sectors, etc.

Besides, although diversification can be less fruitful nowadays, it is also more accessible. Any investor can acquire an insane level of it very cheaply, by buying a few, low cost funds.

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