Remember Maverick singing this Righteous Brothers classic to “Callsign Charlie” in Top Gun
Well, many experts have been singing this same tune when it comes to traditional diversification. I have heard everything from “it just doesn’t work anymore” to “this is the pie chart of the future.” There have been many credible arguments (by smarter people than I) about just how “modern” modern portfolio theory is.
So, I ask… has diversification lost “that lovin’ feelin?”
While I agree that moving forward, we, as professional stewards of capital, need to adapt our portfolios to utilize more asset classes (such as alternatives, etc.), I respectfully disagree that diversification has become “di-worse-sification.”
Consider this piece from BlackRock
For those that do not like to read fine print…let me summarize for you. Both portfolios represent the same overall asset allocation (60% stocks, 40% bonds), but one is much more diversified than the other.
The “undiversified” portfolio is a traditional 60/40 blend.
60% S&P 500 Index
40% Barclays Credit Index
Whereas, the “diversified” portfolio looks like this:
12% S&P 500 Index
12% S&P 400 Mid Cap Index
12% S&P 600 Small Cap Index
12% MSCI EAFE Index
12% MSCI Emerging Markets Index
13.3% Barclays Credit Index
13.3% Barclays US Treasury Index
13.3% Barclays US High Yield Index
I am colorblind, so I won’t even attempt to mention which line is what color….but over the time period shown (1998-2012), the diversified portfolio won, quite handily. The only thing missing here is the risk/volatility characteristics. Did the diversified model have less volatility? That piece is missing….
Anyway….great piece BlackRock!