Diversification in Today's Linked Market

Physician's Money Digest, January31 2004, Volume 11, Issue 2

According to a recent article in the Wall Street Journal, the golden rule of investing---reduce risk by diversifying your money---is getting harder to follow. Research shows that a number of investments whose prices once rose and fell independently of each other are now increasingly correlated. The Journal quotes a recent report from Merrill Lynch & Co, which found that small stocks were 94% correlated to the broad Standard & Poor’s 500-stock Index. Simply put, when the S&P 500 rose, an index of small stocks also rose 94% of the time---only 6 years ago, the figure was at 62%. Even commodities like oil and precious metals are increasingly moving together with stocks. As a physician-investor, you must now work harder to diversify your portfolio so that all of your investments don’t potentially crash at the same time. Experts quoted in the Journal recommend investing in uncorrelated assets, such as bonds and cash---and also funds that invest in high-quality bonds like long-term government bonds or corporate bonds with high credit ratings. Unfortunately, these investment vehicles have had small returns over the past 2 years.