Diversifying your asset allocation among investments with a low correlation can and should reduce your portfolio’s volatility and boost your returns. But critics are claiming this strategy is no longer valid. That’s because they don’t understand the nature of what happened in 2008.
Rebalancing between asset classes boosts returns and decreases volatility. But setting your asset classes based on sectors of the economy is not an effective strategy.
In this formula is deep wisdom, both for portfolio construction and for determining which categories are worth regular rebalancing.
Generally, a correlation that can drop below 0.6 with other asset classes is a good candidate to become its own asset class.
Diversifying your portfolio means finding assets that have value on their own merits but do not move exactly alike. A critical investment metric called “correlation” is used to construct a portfolio most likely to meet your personal financial goals.