Portfolio diversification effective in down market

Investors have had to deal with paltry returns over the last few years, but diversification is still an effective tool. Diversification means combining different assets that do not correlate with each other, meaning they do not move together.

USA Today reports that the Standard & Poor’s 500 index yielded a meager 1.4 percent between January 1, 2011 and November 30, 2011, according to data provided by money management firm IFA.com. In contrast, an investor who created a portfolio including other assets, such as a 40 percent allocation to bonds, yielded 5.7 percent during the same time frame.

Equities have been particularly hard-hit since the Dow peaked in July of 2007. The media outlet reports that an investor who bought the best stocks of 2007 and held onto them during the ensuing recession would have a portfolio down 60 percent.

Although asset classes have a higher correlation in a bear market than in a bull market, diversification can provide benefits regardless of economic conditions. Young investors might benefit from researching this investment technique when participating in long-term planning.  

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