Geoff Considine

'False' Diversification May Prove Costly In 2007

I agree with your basic premise but it is really very simple. You need to look at correlations--actually look at statistics rather than simply diversifying by style. I have written a number of articles on this topic on SA and elsewhere. It is actually not hard to do, but many people do not understand that you can quickly evaluate correlations. Emerging markets indices, for example, show surprisingly high correlations to the s&P500. If you want real diversification, there are metrics that measure this for a total portfolio.

This article shows correlations among a series of asset classes that many people THINK diversify them, but really are not very good diversifiers:

etf.seekingalpha.com/a...

This article shows some big U.S. equities that have really powerful diversification benefits:

usmarket.seekingalpha....

Investors must understand basic statistical performance measures if they want to achieve real diversification.