Emerging Debate in Financial Planning

As I have stated elsewhere, I believe that we are in a long-term bear market.  Most of us started investing in the greatest bull market of all time, the period from 1982 to 2000.  Most investors adhere to principles that were developed during that time.

Concepts like asset allocation, diversification, indexing, mean regression, etc., existed prior to the great bull but they became commonly accepted, even canonized during that period.  What we are seeing now, however, is that these concepts largely fail during bear markets.

During bears most asset classes become highly correlated, eliminating the benefits of diversification.  It is now clear that there are very real limits to traditional asset allocation during periods of high correlation.

This article is representative of new commentary that is beginning to emerge.  The bottom line from these authors is that “advisors should focus more on hedging than diversifying”.  This certainly assaults the current orthodoxy of my profession.

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