But during the financial crisis, investors who thought they were “diversified” found out they didn’t have exposure to enough asset classes.
“The fact is that in times of stress, correlations of stocks and bonds rises greatly,” BlackRock writes. “And a traditionally diversified portfolio contains a high degree of equity risk.”
In this chart, the turquoise line represents a portfolio that is 60% large cap stocks and 40% bonds. It’s reasonably diversified, but could be way more diversified.
The purple line represents a portfolio that is 2% large cap stocks, 12% mid cap stocks, 12% small cap stocks, 12% foreign developed country stocks, 12% emerging market stocks, 13.3% investment grade bonds, 13.3% US Treasury securities, and 13.3% junk bonds.
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