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Today I’d like to show an example of how investors could have benefited from strategic diversification in just the past few months. The following graph shows the last six months of daily activity in the three primary markets in which we invest: stocks, bonds, and gold.

During the first four months of the graph (segment A) all three asset classes were generally rising, which benefited strategically diversified portfolios because all three asset class allocations were going up.

However, in the past month, stocks fell at various times. But each move down by stocks (marked B, C, D in the graph) was matched by a move up in bonds and gold. Strategically diversified portfolios benefited from this as well since the two rising asset classes either decreased the impact of falling stock prices or overcame them entirely, depending on the portfolio’s allocation.

The purpose of this example is to reinforce that we build portfolios with strategic diversification because it works, not because it is a neat idea. Capital flows among the major asset classes is a real phenomenon. Strategic diversification deliberately builds in exposure to each of the major asset classes so that market movements can provide as much opportunity as they do risk.


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