Portfolio diversification does not necessarily mean 60/40
Portfolio diversification is key to reducing risk and maximizing potential return in the long run. Many investors’ portfolios follow the 60/40 rule – 60% in stocks and 40% in bonds. The benefit of the 60/40 rule is the negative correlation between stocks and bonds. However, there have been times where the correlation between stocks and bonds have increased. According to the CNBC.com article, “The 60/40 Stock Bond weight rule needs to go on a crash diet,” the last ten years have shown a correlation of -0.78. The closer stocks and bonds get to a positive correlation, the fewer the benefits of a stock plus bonds diversification strategy.
The solution? Revisit your portfolio strategies. It might be time to look at other diversification options. Bonds are not the only asset class available to offset the risks of investing in stocks. And while a 60/40 portfolio might work as a general rule, it may not be appropriate for everyone.
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