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Institutional Investor: AQR says "Plain Old Diversification Still Investors’ Best Bet"

edited September 2018 in The Bullpen
(Don't believe that this has been previously referenced.)

AQR: Plain Old Diversification Still Investors’ Best Bet - by Amy White, 09-28-2018

Strategies like selling equities when valuations are high or buying put options have not historically worked out as well as simply holding uncorrelated assets, the quantitative investment firm found.

Referenced AQR paper: It Was the Worst of Times: Diversification During a Century of Drawdowns

Big equity drawdowns happen time and again and tend to drag down
typical investor portfolios with them. Unfortunately, attempting to
tactically avoid the next equity selloff is likely to disappoint investors.

In this article we use nearly 100 years of data to evaluate the
effectiveness of diversifying investments during the worst of
times for most portfolios. We also analyze the potential benefits
and costs of shifting away from equities, including into investments
that are diversifying (i.e., lowly correlated) and investments that
are defensive (i.e., expected to outperform in bad times).

With regard to the latter, we observe an intuitive trade-off:
investments with better hedging characteristics tend to do worse on
average. Investors should evaluate this trade-off in deciding how—
and how much—to diversify their exposure to equity drawdowns.

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