Correlations

[tsptalk]

Thanks for sharing that.

 

[rokid]

I attended the Vanguard Diehard Reunion in Alexandria, VA over the last two days. Financial experts/authors John Bogle, Rick Ferri, Ed Tower, and William Bernstein also attended (Google any of them).

Rick Ferri and William Bernstein made the point that asset class correlations increase in market downturns, i.e. when the market crashes, everything, domestic, foreign, growth, value, large, and small all crash together. However, when the market recovers, correlations decrease, i.e. the various asset classifications recovery differently.

Consequently, contrary to conventional wisdom, diversification doesn't usually help in market crashes. However, it becomes very important as the market recovers.

They also made the point that foreign investments should be unhedged to take advantage of currency differences. Finally, they made the further point that currency differences don't matter as much in emerging markets as they do in developed markets, i.e. Europe and Japan. Fortunately, the I Fund is unhedged.