Investors have been told investing across different asset classes (known in the industry as asset allocation) is the best means of diversifying their portfolio, yet they continue to experience violent swings in the value of their wealth with each successive crisis. The typical prescription is to remain focused on the long term and consider adding more asset classes and sub asset classes to the myriad already in their portfolio, which promises to ameliorate the problem. But, it doesn’t. There is a paradox of asset allocation in that uncorrelated assets attract money flows which cause them to become more correlated, thus eroding the very diversification benefits investors hope to achieve. At Rain, we believe traditional asset allocation leaves investors over allocated and continually under diversified. The reality is, investors aren’t frustrated with diversification, they’re frustrated with the consensus approach to getting there.
This is an excerpt from our article “The Asset Allocation Merry-Go-Round” published December 16, 2011