The Challenge of Diversified Investing in a Correlated World

Below is a Fidelity Investments heat map showing the investing terrain of the past year, particularly how correlated a variety of investment classes were to the S&P 500 Index over the 12 months ended August 2010. As has been much discussed, many investment classes have moved in close tandem to this US Stock index. It is a small world after all.

But for those defending the importance of a continued commitment to bonds despite the low yields (Jack Bogle, Bill Bernstein, and Fidelity itself, among them) this map provides much support. Investment grade bonds and 30 day T-bills are the truest counterweight to all equities in every region of the world. Precious metals in general, gold in particular, the Yen, agriculture and livestock provided balance too.

The graphic comes from Intelligent Speculator, who notes surprise at the BRIC and Emerging Market’s similarly close correlation to the US market, and also predicts a more valuable role for real estate moving forward.

(Please click on image to enlarge.) Comments, insights, questions welcome below.

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