Diversification theory revisited

Given the recent volatility in equity markets around the world, investors could be forgiven for wondering if it might not be better to stick to cash for the time being

Even though global stock markets have experienced sharp falls recently, the long-term investor has frequently been well rewarded for the risks taken by investing in equities. A more useful line of enquiry might be to revisit the whole theory of diversification. In the field of investment, diversification across different asset classes with as little correlation between them as possible has been made famous by the much-quoted example of the Yale University endowment fund - delivering an average return of 16% or so in every year since 1987 without a single year of losing money. The very hal...