How To Diversify An Equity Portfolio
"Help! I need to diversify my equity exposure!"
Fortunately, we have lots of data and research to show which asset classes are helpful in adding diversification to a stock portfolio. Here are a few asset classes you may want to look into, and two that are wrongfully assumed to add diversification.
U.S. Treasury Bonds - Long hailed as a great asset class for diversification, and with good reason. Over the past 20 years both long and short UST have had a negative correlation with US stocks. I prefer 20yr+ UST personally.
Gold - Not gold bars or coins, but exposure to the asset class through a cheap fund like GLDM, can add diversification to your portfolio. Keep in mind this is a long term hold, not an asset to speculate in.
International Stocks - Many advisors will say that adding international equity exposure will increase diversification, but unfortunately the research doesn't support that claim. Many large US companies have a global presence now, and these funds are highly correlated to US stocks.
Corporate Bonds - "I'm buying bonds, so they will help diversify my stocks, right??" Wrong. Corporate bonds, especially high-yield or "junk" bonds, are actually highly correlated with the stock market. They can be helpful for income, but do little to help us increase the diversification of a stock portfolio.
When looking to add diversification to an equity portfolio, it is important to use facts, data, and research to drive your decision making. Simply relying on popular opinion and generally accepted falsehoods may be costly.
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How to diversify an equity portfolio.
