Welcome to our active management update on the market
In this week’s Market Hotline, Flexible Plan’s president, Jerry Wagner, talked about diversification. He pointed out that asset-class diversification is a nice start, but it is not a complete solution. Why? Because as risks increase, so do the correlation among asset classes. To illustrate this, I have provided the following graph of stocks, bonds, and gold (via total-return ETFs) covering the year 2008. We can clearly see here that asset classes were not a defender of capital in an environment where investors wanted their capital out of every market, not just one market.
Here’s another way to think of it: Asset-class diversification is an important concept and a great place to start when constructing a portfolio. Nearly everyone in the business does this, including Flexible Plan. This step by itself spreads risk among asset classes much the same way a real estate investor invests in multiple properties to spread their risk beyond a single property and location. However—and this is important—asset-class diversification does not manage the risk associated with investing in multiple asset classes.
Adding a layer of diverse actively managed strategies to an array of asset classes is what provides risk-managed, asset-class-diversified portfolios to investors in all risk profiles. And it is this risk-management experience and expertise that sets Flexible Plan apart from much of our competition.
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