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When was the last time a single cataclysm affected every financial market at the same time? We have a greater ability to diversify now than anyone did 100 years
by cheriot 6y ago
When was the last time a single cataclysm affected every financial market at the same time? We have a greater ability to diversify now than anyone did 100 years ago.
- oceanghost 6y agoA year ago?
- cheriot 6y agoIt's not a cataclysm when markets recover in 6 months. OP is talking about getting wiped out.
- oceanghost 6y agoJust wait for the (hyper?)inflation.
- nradov 6y agoIn practice diversification has actually gotten harder for most investors. The correlation coefficient between all major asset classes during periods of high volatility has increased across the board. Investors have had to move into riskier illiquid assets in pursuit of uncorrelated returns.
- cheriot 6y agoThe events OP is talking about are not normal market fluctuations: > wars, bankruptcies, currency devaluations, revolutions, government confiscations, hyperinflationary periods, and other economic cataclysms Those are primarily political risks. Not independent events, of course, but very different than correlations between asset classes.
- nradov 6y agoSo what? Regardless of the cause, the point is that there will be occasional "black swan" events when all major asset classes fall together and diversification becomes less effective.
- cheriot 6y agoZoom out farther. Markets regularly take major hits and then recover, but someone only invested in local markets in 1914 France or Venezuela today is starting from scratch. OP was talking about the events that leave people with nothing. Those are political events and diversification is about which governments one is exposed to.
- cinntaile 6y agoAnd the internet is constantly making it easier to access illiquid assets, making them more liquid. When you say correlation coefficient, I assume you mean the positive one?
- nradov 6y agoThe correlation coefficient is in the range -1 to 1. The Internet hasn't really made it much easier to invest in the types of illiquid assets that would interest large institutional investors. Those investments are still largely based on personal relationships and negotiations, often facilitated by brokers or bankers.
- cinntaile 6y agoYes but if they're negatively correlated and everything is tanking then they won't impact your returns as much than if they're positively correlatd.
- nradov 6y agoThe problem is that almost every asset class now becomes positively correlated during economic crises. It's very difficult to find negatively correlated or uncorrelated returns in those situations.