RICH BERNSTEIN: 3 Things You Should Know About Financial Asset Correlation

Rich Bernstein, founder of Richard Bernstein Advisors and former Chief Investment Strategist of BofA Merrill Lynch, just published a white paper titled Diversification Remains Difficult.

Diversifying portfolios by adding low correlated assets its something Bernstein has written much about.  But he’s not convinced investors are getting the message.

“In particular, we remain quite concerned that investors appear grossly under-diversified,” he writes.  “Diversification is not dependent on the number of asset classes, but rather it depends on the correlations among those asset classes.”

Bernstein lists three things investors should keep in mind when diversifying their portfolios.

1)    Correlations are dynamic rather than static. Investors should not assume that past correlation studies are accurate today. For example, correlations today are vastly different from those of 10 years ago.

2)    One can make short-term correlations yield any desired result by using different time periods or frequency of returns. For that reason, we examine the trend in correlations. We believe this is a much more meaningful statistic because it incorporates longer-term investment results.

3)    As was true six years ago, treasuries are the only major asset class that has negative correlation to equities. As such, we continue to maintain larger-than-consensus weights in treasuries in our asset allocation strategies to help reduce portfolio volatility.

Here’s a chart from Bernstein’s paper showing how correlations have changed in the last 10 years:


Photo: Richard Bernstein Advisors

Business Insider Emails & Alerts

Site highlights each day to your inbox.

Follow Business Insider Australia on Facebook, Twitter, LinkedIn, and Instagram.