PORTFOLIO DIVERSIFICATION’S FAILURE TO PROTECT IN BEAR MARKETS CALLS FOR A NEW STRATEGY

February 12, 2021

Part 1 of 2
Talk to most investment professionals and they will tell you that portfolio diversification is the key to successful investing and that asset allocation among multiple asset classes, not individual security selection, accounts for as much as 100% of investment returns. Being broadly diversified among different asset classes is supposed to give you strong exposure to market rallies and protection in down markets as non-correlated assets zig when others zag and soften the downside impact.

However, there are times when diversification doesn’t seem to work. Take the huge sell-off in the spring of 2020, the shortest bear market in history when asset classes plunged pretty much across the board, even gold and Treasuries took a hit.

What are the lessons to be learned about the usefulness of diversification from 2020’s experience? Is there a better way?

Our guest today is a financial thought leader in asset allocation at T. Rowe Price. Sébastien Page, Head of Global Multi-Asset at the firm. Page is also the author of a new book titled Beyond Diversification: What Every Investor Needs to Know About Asset Allocation.

Page says diversification did fail in 2020’s bear market but that shouldn’t surprise us, and yes, there is a better diversification strategy. We’ll find out what it is.

Also, watch Part 2

WEALTHTRACK Episode #1733; Originally Broadcast on February 12, 2021

Listen to the audio only version here:

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SÉBASTIEN PAGE

AVOID MARKET TIMING

  • Historical evidence shows market timing leads to significantly lower returns than buy and hold strategy
  • Market timing also leads to increased volatility
  • “…the volatility of investor returns is higher than the corresponding volatility in nearly all specifications.”
  • “Specifications’’ considered: individual stocks, stock mutual funds and stock indexes in U.S. and major international markets
  • Increase in volatility with trading is significant: 10-75% higher.

Source: “The Volatility of Stock Investor Returns” Ilia D. Dichev, Emory University, Xin Zheng, University of British Columbia

OWN STOCKS

  • Stay invested
  • Stay diversified
  • Don’t try to time the market
No stock mentions in this episode.

This is the first appearance of Sébastien Page on WEALTHTRACK

FINANCIAL DNA

Nurture or nature? T. Rowe Price’s asset allocation thought leader, Sébastien Page reflects on the influence his Finance Professor father had on his career path.

Sébastien Page photo courtesy of @michellequance


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