Re: High correlation
yalanand
6/5/2011 2:33:37 PM
Phoenix,
I totally agree with you "wait and watch" is the best policy or may be invest in safe heavens like Gold. But Gold near life time high even investing in Gold looks risky.
Maximizing Returns When Markets Move in Sync
Street Smart
5/27/2011 10:50:01 AM
Benjamin, I found your post really interesting but I feel like one of those three year olds who keeps says "Yes, but WHY?"
It seems that we have some serious global herd behavior going on here but I wasn't understanding what sets off the herd decision as to whether it's a risk on or risk off day.
And what is underlying this homogenization of risk to begin with? Does this have to do with low interest rates? Commodity prices?
More! We need more!
Re: High correlation
Phoenix
5/26/2011 4:57:10 AM
I think you are right. The market trends are bound to change and all this time the old system of diversification worked. The present conditions seem to be out of the ordinary. So wait and see might be a good option.
High correlation
tokyogai
5/26/2011 3:34:45 AM
It would seem these high correlations would argue against diversification, because there would be little risk avoidance. But somehow we know that this is really not true. The psychology of the market seems to be driving the herds in different directions each day as the news comes in. I would think over time this would stop happening. Maybe hang on and wait it out is the best advice?
Re: Historical occurrence?
Phoenix
5/25/2011 12:47:39 PM
This certainly is a dilemma for the investor who aimed for a good diversified portfolio. In your opinion what do you think are the main reasons for the present close correlation between asset classes?
Investor Psychology plays a part.
People who make investment decisions now interact with very different investments in exactly the same way - through a computer terminal that shows the ever-changing prices. Stocks, Bonds, Commodities, Currencies can all look similar. But they're not.
This presents an opportunity to the investor who can differentiate between the investments that are falling for good reasons versus the ones that are only selling off because everyone is running for the exits.
It's not a unique occurrence, but both the degree and the duration of elevated cross-asset correlation that is happening now is unusual. The basic point is that typically, asset classes react differently to economic and market events, because the underlying risk premia in those asset classes are varied. So a long investor buying a diversified portfolio is 'normally' exposed to diverse risk premia over time. Something is happening in the current market (and there are lots of reasons for it) such that most asset classes are trading in unison, implying that it's just a handful of sources of risk premia that are driving markets right now.
Historical occurrence?
AskAsa
5/25/2011 11:33:11 AM
Hi Ben,
Is this tight correlation of asset classes a historical pattern or is this a unique occurrence? If it's happened before, is there any link between conditions then and now? Why doesn't this pattern develop under "normal" conditions? Thanks for your insight!
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