February 15, 2009

The above chart represents the return for nearly every combination of equity investments you could have made over the last year. No sector, style, world region or market cap escaped devaluing more than 25%. Compare this to the start of our last recession between 2000 and 2001.

Just within U.S. equities, proper diversification likely could have avoided 40% losses caused mainly by one sector. And, in fact, it was eminently possible to find a safe haven sector (ironically, financials) to hide from the carnage.

While The Curious Investor and most investing blogs our there focus mainly on equity investments, the past year has taught us that the old adage, Theres always a bull market somewhere, is not always the case for the equity markets.  Or, is it?

Diversification is more than buying stocks in different industries and geographies

Risk comes in many types. Diversification through different companies and industries can help to insulate you only a few unsystematic risks namely industry risk, company specific event risk, and geopolitical risk. To properly diversify, you need to consider investments outside of equity markets asset allocation .

Asset Allocation with a Brokerage Account

It can be difficult for retail investors to access non-equity assets. Most brokerages offer some access to U.S. Treasuries and other government or municipal bonds as well as a small amount of corporate bond placements. But, these can often come with significant fees or minimum investments. There is a more cost effective route. Ironically, these investment vehicles trade through typical stock exchanges. Just as The Curious Investor has previously discussed using ETFs and ETNs to create hedges and passive indexing. its possible to use ETFs and ETNs to gain access to assets outside of the markets.

For me personally, given the state of our economy and the likely pressures on the U.S. dollar as a result of policy actions to remedy the situation, Im interested in adding commodity exposure (click to check out my rationale on gold and oil ) and foreign bond exposure. It just so happens that theres an ETF for all these purposes IAU. OIL. and IGOV  (and more if you look around). While the IGOV was brought to market less than a month ago, data for IAU and OIL show correlation of .20 and .33, respectively. About as uncorrelated as a risk asset can get and exactly what youre looking for when properly diversified.