Quote of the Week

“The only thing that goes up in bear markets is the correlation between asset classes.”
— Richard Davis, Needham & Co

I’m sure it’s a bona fide “ism” in the finance industry, but I’d not heard it before. And boy does it seem true. Consider this headline: “Stocks, Oil, Gold Tank on Growing Recession Fears.

Isn’t gold supposed to inversely correlated to stocks? Aren’t commodities only partially correlated? And, worst of all, aren’t hedge funds supposed to be uncorrelated or inversely correlated?

If you believe the “ism,” it’s a great argument to suggest that a diversified portfolio is a fair weather friend, an illusion that appears to work in smooth seas but that sinks in rough ones. Is real diversification possible — i.e., diversification where the correlation doesn’t head to 1 in rough times? I’m not so sure.

2 responses to “Quote of the Week

  1. I hadn’t heard that one either…how true!

  2. haven’t heard that too…

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