WHY ISN’T DIVERSIFICATION WORKING?

WHY ISN’T DIVERSIFICATION WORKING? Howard Johnson called my attention to a blog by Professor Aswath Damodaran which has a stream of insights on finance. Here he points out that it is harder to use diversification to reduce risk in portfolios than it was twenty years ago for two reasons: “1. The correlation across equity markets has risen dramatically”; and “2.Securitizing real estate and bringing it into portfolios has made risk in the real estate market more closely tied to the overall equity market.” He emphasizes that diversification is still very important. It’s just harder to do and provides less benefit in reducing risk.