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Conventional diversification is the ubiquitous risk management solution and usually the only risk management solution employed by the investment management industry to protect portfolios against large losses when they occur.
Conventional diversification is a useful risk management tool, however its tendency to fail when it is needed most is rarely understood or acknowledged within the investment management industry.
We explore conventional diversification, how it works and why it frequently fails at the time of greatest need.
Show Notes
Chart 1
Frequency of Large S&P 500 Losses Since 1928
Data as of 3/31/2020
Chart 2
Asset Class Returns
2/19/2020 – 3/23/2020
Source: Morningstar Direct
Chart 3
Correlation Changes During the Worst U.S. Stock Market Losses
Data Source: Sebastein Page and Robert A. Panariello (2018). When Diversification Fails. Retrieved from https://www.tandfonline.com/doi/suppl/10.2469/faj.v74.n3.3/suppl_file/ufaj_a_12043535_sm0001.pdf
Chart 4
Correlation Changes During the Best U.S. Stock Market Rallies
Data Source: Sebastein Page and Robert A. Panariello (2018). When Diversification Fails. Retrieved from https://www.tandfonline.com/doi/suppl/10.2469/faj.v74.n3.3/suppl_file/ufaj_a_12043535_sm0001.pdf
References
Sebastien Page and Robert A. Panariello. 2018. “When Diversification Fails.” https://www.tandfonline.com/doi/ref/10.2469/faj.v74.n3.3?scroll=top
Podcast Disclosure:
3Summit Investment Management is a registered investment adviser and the opinions expressed by 3Summit on this show are their own. All statements and opinions expressed are based upon information considered reliable although it should not be relied upon as such. Any statements or opinions are subject to change without notice.
Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed.
Information expressed does not take into account your specific situation or objectives, and is not intended as recommendations appropriate for any individual. Listeners are encouraged to seek advice from a qualified tax, legal, or investment adviser to determine whether any information presented may be suitable for their specific situation. Past performance is not indicative of future performance.
