Diversity reduced if correlation is high?

helvetica

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Hi, investment novice here. I just met with my financial consultant who likes GARS. I like ETF's. After reading a little about gars, while it looks like a good, safe option, I felt the same protection could be had with enough diversity. He felt diversity is no good unless you have low correlation (new to me). Any thoughts?
 
If you invest in two asset classes which are highly correlated, then they will tend to act in similar ways - go up at the same time, go down at the same time etc. That defeats the purpose of diversifying.
 
Helvetica,

I have studied this question extensively and I would tend to agree with you that in principle it is possible to create a portfolio of ETFs that has similar risk return characteristics as GARs.

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In fact in this sample an almost identical result was achieved with just two funds

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The point about low correlations is extremely valid. I can reduce security specific risk like the risk of having all of my money in say CRH shares by holding lots of stocks. But if stocks in general decline then I also need to hold assets the are weakly or ideally negatively correlated with stocks such as bonds or real estate.

Which is the best strategy really depends on which you believe will give the best average return after costs over YOUR time horizon.

A low cost diversified index strategy or a higher cost actively managed fund. In any robust study of fund manger performance against the market, the conclusion tends to support the view that the lower cost strategy will win out in the end.

http://seekingalpha.com/article/1141031-can-active-investing-beat-the-market?source=google_news
 
Great response Marc you understood my question perfectly (I wasn't sure if I framed it well). It's interesting that the example cited of a simulated gars uses the msci world Index, as that is the fund our finance guy compares the gars to, over a 5 yr period, to demonstrate how the gars outperformed it, and with much less volatility.
 
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