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Why diversification failed to control investment risk


Diversification has failed to protect investors in this bear market in the way they were told to expect. In this article on the company website No Monkey Business explains how the investment management industry (whether focused on traditional ‘balanced management’, new ‘multi-asset class’ or ‘absolute-return’ investing) has failed to develop robust processes for quantifying and controlling client’s risks because it was relying instead on unrealistic benefits from diversification.

The lessons of 2008 are consistent with the No Monkey Business principle that the only reliable form of risk control is to dilute exposures to risky assets by holding risk free assets. With risk controlled at this high level, you are safe to use a narrow range of core, low-cost assets: equity market trackers, index linked gilts and cash. Understanding the reasons will give you confidence to ignore, and keep ignoring, the industry’s widely hyped alternatives. Trackers should be diversified across the world’s major markets and by definition are fully diversified within each market. This is the diversification that can be relied on.

#alternatives #assetallocation #diversifaction #ldi #risk

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