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The Right Ways to Diversify

03/17/2011 11:53 am EST


Christine Benz

Director of Personal Finance, Morningstar, Inc.

While some longstanding mores of the market have been changing in recent years, that hardly means you should give up on diversifying your portfolio. In this exclusive interview with, Christine Benz of Morningstar explains how to adapt time-tested advice to a new world. 

Recently, we’ve seen a lot of asset classes move together, and that really pretty much puts a kibosh on the whole diversification argument. What do you think about diversification?

I still think it’s important. A lot of people point to that 2008 market environment when you saw stocks go down, you saw corporate bonds go down. Really the only thing that performed reasonably well were treasury bonds during that period.

But really the magnitude of losses among some of those asset classes saw significant differences, so corporate bonds certainly lost a lot less than stocks.

I still think that diversification is an investor’s best friend. I don’t think you can give up on it just because we had one period where you saw a lot of assets moving in the same direction at once.

How does an investor determine what type of asset allocation is best for them?

It’s a tough question. Jack Bogle would say subtract your age from 100, and that’s how much you should have in stocks. I think that’s a reasonable starting point, but investors can use some other tools.

One thing that I often point investors to are target-date mutual funds. Those are funds that progressively get more conservative as you get closer to needing your money.

Even if you don’t invest in one of those funds, I think it’s a good source of intelligence about an appropriate asset allocation for someone with the same expected retirement date, such as what the portfolio looks like—and then I think you need to tweak it a little bit, based on your own individual factors, and what you think your own picture will be in retirement.

So, if you’re someone lucky enough to rely on a pension, for example, that would argue for having a little more in equities, because you have other sources of income that you can rely on. Same thing if you’ve got an annuity or even if you’ve got a part-time job. Those are all things that will help supplement your income in retirement, and that would give you more leeway to have a bigger “growth” portion of your portfolio.

And when you’re talking about stocks, are you just looking at US stocks? Or do you look at international stocks, and is that developed markets or emerging markets?

I think you absolutely want international in a portfolio. Arguably, too many US portfolios are too US-centric.

When you think about the percentage of the global market capitalization that is US stocks, it’s about 45% currently—so if you have a lot more than that in US stocks, be aware that you’re making a big bet on the US market.

If you’re comfortable with that and like that, fine, but I personally think that it’s important to be exposed to other regions, and certainly a nice dose of emerging markets—although I would say, given the run up that they’ve had over the past few years, I don’t know that I’d be really aggressive adding there.

The other thing to point out is that a lot of international funds and diversified funds have been adding to emerging markets, so you may be doubling up on your exposure if you’re really glomming onto emerging markets as well.

Know what you’re buying.

Right, absolutely.

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