I read somewhere that if something you own isn't going down, you're not truly diversified. The logic being that if everything you own goes up at the same time, your portfolio is too correlated to be called diversified.
By that test I'm definitely diversified. With the S&P up about 11% so far this year, my best example of diversification seems to be long Treasury bonds, which are down over 20% (using TLT as a benchmark) Over other time periods recently, I've seen diversification work its magic on REITS, energy shares and other assets.
But long T-Bonds were about the only asset class with big positive returns in 2008, gaining about 30% (benchmark: TLT). And REITS made real gains in 2006, over 35% (benchmark: RWR), while energy shares (benchmark: XLE) climbed double digits in the first half of 2008, at a time the S&P was sinking double digits.
And despite their troubles, T-Bonds, quality REITS and blue chip energy stocks are generating interest and dividends that often exceed the 4% or so an income investor might need to withdraw from a pummeled mutual fund account.
So it's low sweat: if you want to live on your portfolio, diversification, dividends and interest can be your best friends, even when (maybe especially when) everything isn't going up.
For a reminder of the original meaning of 'diworseification' (and some classic investment reading) dust off a copy of Peter Lynch's book One Up on Wall Street.
Disclosure: I own individual securities in these asset classes and sectors, but not these ETFs.
An earlier version of this post appeared on my blog lowsweatinvesting.blogspot.com on July 27, 2009.