Our “Off The Wall” Blog
is now Monument #Unfiltered

Subscribe below to receive our unique, straight-forward, unfiltered wealth advice delivered straight to your inbox.

Volatile Markets Have Turned Diversification on its Head-But Don’t Panic

U.S. News and World Report Smarter Investor

Don’t let temporary trends ruin your opinion about diversification.

The high volatility and unpredictability of today’s markets have many investors asking why good old-fashioned diversification hasn’t been working in their portfolios.

Diversification refers to the concept of holding a variety of asset classes so that when one doesn’t perform well, the others may provide some buoyancy. For example, diversification should operate like pistons in an engine—while some pistons are going up, some are going down, but the car is moving forward.

So what’s different in today’s markets? Right now, asset classes that have historically moved independently of each other (such as domestic stocks, domestic bonds, and international securities) are moving up and down together. Uncertainty, intense investor emotions, and high volatility are resulting in unusual market behavior.

Many investors have been tempted to cut and run, moving their money into cash accounts, but I believe the current activity is an anomaly that will resolve itself in the long run. When it comes to building a solid investment strategy, a well-diversified portfolio is still the way to go.

In theory (and at its most basic academic level), a solid diversification strategy incorporates asset classes that have a low level of correlation to each other. Correlation is a measurement of how much one investment (Investment A) moves in relation to another (Investment B) and is represented by a number between -1 and +1. Positive correlations mean A & B tend to move up (and down) at the same time. If investments A & B have a correlation of +1, they move up and down exactly in step with one another in the same direction—one for one. Negative correlations mean A & B tend to move in opposite directions of one another. If they have a -1 correlation, they move in exactly opposite directions of each other.

But remember, just because assets have historically been positively or negatively correlated does not ensure that they will always act like that.

Case in point: the market’s erratic behavior since the 2008 sell-off. Asset classes that have historically had correlations of less than +1, or even negative correlations, have all been moving up and down together to a greater degree than normal—thus exhibiting short-term correlations of closer to +1 than normal.

That’s a reason why even diversified portfolios are feeling the sting in today’s environment, but that doesn’t mean that you should abandon your diversification strategy.

As always, it’s important to be aware of what’s happening right now.

Please remember, diversification does not and never will assure a profit. That said, evaluate your return requirements, appetite for risk, and requirements for liquidity against your financial plan and double check the historical correlation of the asset classes in your portfolio. If you’re on track, take the long view and stay the course with your diversified investment strategy.

David B. Armstrong, CFA, is a managing director and cofounder of Monument Wealth Management in Alexandria, Va., a full-service wealth management firm. Monument Wealth Management is backed by LPL Financial, the independent broker-dealer and Registered Investment Advisor. David has been named one of America’s Top 100 Financial Advisors for two straight years by Registered Rep Magazine (2009 and 2010, based on assets under management) and has been interviewed by several national media sources over the past several years. Follow David and Monument Wealth Management on their blog Off The Wall, on Twitter at @MonumentWealth and @DavidBArmstrong, and on their Facebook page. Securities and financial planning offered through LPL Financial, Member FINRA/SIPC.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendation for any individual. All performance references are historical and are not a guarantee of future results.

Read the article on U.S. News & World Report here! >>

Get Monument #Unfiltered: Our Free Private Wealth Newsletter

Our no B.S. wealth advice delivered 2x per month, max. Tuned specifically for busy, high-net-worth business professionals and investors who want straightforward advice without the fluff.


Please remember that past performance is no guarantee of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Monument Capital Management, LLC [“Monument”]), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.  Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions.  Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Monument. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. No amount of prior experience or success should be construed that a certain level of results or satisfaction will be achieved if Monument is engaged, or continues to be engaged, to provide investment advisory services. Monument is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice.

A copy of Monument’s current written disclosure Brochure discussing our advisory services and fees is available for review upon request or at www.monumentwealthmanagement.com/disclosures. Please Note: Monument does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to Monument’s website or blog or incorporated herein, and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly.

Historical performance results for investment indices, benchmarks, and/or categories have been provided for general informational/comparison purposes only, and generally do not reflect the deduction of transaction and/or custodial charges, the deduction of an investment management fee, nor the impact of taxes, the incurrence of which would have the effect of decreasing historical performance results.  It should not be assumed that your Monument account holdings correspond directly to any comparative indices or categories. Please Also Note: (1) performance results do not reflect the impact of taxes; (2) comparative benchmarks/indices may be more or less volatile than your Monument accounts; and, (3) a description of each comparative benchmark/index is available upon request.

Please Remember: If you are a Monument client, please contact Monument, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services.  Unless, and until, you notify us, in writing, to the contrary, we shall continue to provide services as we do currently. Please Also Remember to advise us if you have not been receiving account statements (at least quarterly) from the account custodian.