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This morning I watched Conseulo Mack: Wealthtrack and I found that it was extremely interesting advice about Diversification and Asset Allocation.

The most interesting point is one that is probably proved out in your own investments and 401k: International Indexes and US Stock Indexes have extremely high correlations. One graphic at the beginning of the show shows that the correlation of the S+P 500 to the MSCI EAFE Index from about 2003-2009 is between 80 and 90% with some small changes.

The point of this graphic really hits home for me. In my personal 401k, there is a basket of mutual funds to choose from, but if I am interested in equities, there's not much diversification necessarily when shifting from US to outside of the US for stock investing.

A guest, David Darst, author of The art of Asset Allocation - The little book that saves your assets explained that asset allocation had to include a different asset class to prevent losses during the last downturn (I'm paraphrasing). "If you had high quality bonds - Municipals - with adequate allocation and cash, those folks cut their losses in half...down 12-15% rather than 38%."

Another guest, Richard Bookstaber, author of "A demon of our own design" stated the issue succintly. "Diversification works really well until it really matters." In short, If you think that you're diversifying, it doesn't matter when there is a crisis. Two things matter in a crisis. Risk matters and liquidity matters. He also stressed that diversification and deleveraging (in other words, taking risk off the table) are two different issues.

In the end, I was interested in internalizing this point and deciding how I should change my strategy (if at all) for retirement investing. Inflation definitely appeared to be a medium to long-term concern for the guests.

The one investment for each of the guests:

David Darst: Inflation Protection, WIP, SPDR DB Intl Govt Infl-Protection
Richard Bookstabler: Inflation proctection, 20 Year TIPS.
Mark Cortazzo: Templeton Global Bond A Fund (TPINX)

Wealthtrack Action Point: Decide which flood (crisis) protection you want in your portfolio....
extreme 100 year, ST Treasuries, etc
30-70 year, corp bonds, gold, etc
10-25 year, broad;y diversify, change according to preferences.

Of course, the one-investment choices all focus on inflation, so I think that this is an interesting point. Do we really think that inflation will become similar to Turkey or to a South American country?

Comments

Chris said…
I really enjoyed David Darst's book "The Little Book that Saves Your Assets" and will have to check out the title that you mentioned.
12:48 PM
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