Perspectives Blog

Duration for diversification

Columbia Management, Investment Team | November 19, 2013

Many investors struggle to determine the appropriate amount of bond duration in an environment of rising interest rates. The right amount of duration has to be considered in a portfolio context, because the main value of duration exposure comes through diversification. Because of the negative correlation between duration and the returns of riskier assets, high-quality fixed income will still be a cornerstone of any disciplined portfolio. By Za…

Holding multiple investments does not ensure better diversification

Columbia Management, Investment Team | April 23, 2014

The degree of risk reduction benefit in diversification depends directly upon the correlation of the portfolio’s assets. Adding just one zero-correlated asset to a portfolio reduces risk 29.5%, while adding a thousand 66%-correlated assets reduces risk by only 19%. Well-designed absolute return products can be meaningful additions to traditional allocations, substantially enhancing diversification. By Todd White, Head of Alternative Investment…

Correlation’s essential role in diversification

Columbia Management, Investment Team | December 5, 2013

Diversification strategies can help mitigate overall portfolio volatility. An important component of diversification strategies is correlation, or the measure of how one security moves in relation to another. Portfolios with lower correlation among assets will experience less overall volatility, even if the underlying assets are equally volatile individually. Most investors have heard about the concept of diversification, the typical expressio…

Monetary policy shift creates new investment challenges

Columbia Management, Investment Team | August 6, 2013

Going forward, investors should look for return opportunities that do not depend upon easy money. Diversification strategies must take into account expected high correlations and the vulnerability of “safe” assets to changes in monetary policy The repricing of many assets as the second quarter drew to a close has created an expanded set of attractive investment opportunities. For most of 2013, financial markets have been responding to a nearly…

The end of “risk-on/risk-off”

Anwiti Bahuguna, Ph.D., Senior Portfolio Manager | February 3, 2014

…ars (2008-2011). Correlations between equities in different regions (emerging markets (EM) vs. developed markets (DM)) used to be low, but also rose to over 80% during this same period, reducing the benefits of cross-regional diversification. Similarly, correlation between equities and high yielding bonds rose from about 50% to over 80%. When investors took risk, most assets rallied with the exception of sovereign bonds. Conversely, when risk sol…

Q&A with Jeff Knight

Jeffrey Knight, CFA, Global Head of Investment Solutions and Asset Allocation | January 6, 2014

…pportunities in fixed income is wide and varied, and I think it still offers opportunity for return, but not if we organize our portfolios entirely to be about whether rates go up or down. The other reason for owning bonds is diversification, but we have to pay attention to how correlations are moving between bonds and other risky assets, particularly stocks. Since last summer, we’ve seen a much closer positive correlation between the retur…

Time, not timing

Columbia Management, Investment Team | November 26, 2013

Historically, some of the worst short-term market fluctuations and losses were followed by periods of substantial market recovery. Investors who try to time market swings often end up missing out on the market’s best days. Asset allocation, diversification and periodic rebalancing are tools investors can use to help weather market downturns. Sometimes the best selling strategy for investors may simply be — don’t. Focus on buy and hold for the…