Santa Clara, California (PRWEB) March 27, 2012
Historically, investors and financial planners alike have regarded portfolio diversification as objectively good and beneficial. The conventional wisdom is that building a more diverse portfolio is a strong defense against market volatility, especially when it comes to emerging markets. According to the Wall Street Journal, however, this conventional approach is being questioned by more and more financial planners. Economist Sharath Sury has issued a statement saying that planners and investors need a fresh perspective when it comes to diversification—as well as a greater understanding of the strategy that it requires.
Sharath Sury is an internationally recognized economist, Chairman of the Sury Institute for Financial Innovation and Risk Management, and an adjunct professor of financial economics at the University of California. He affirms that the increased movement of financial planners away from traditional conceptions of portfolio diversification is prudent—not because diversification is negative, but because it is frequently misunderstood.
“Portfolio diversification works on the principle that asset classes, investment sectors, or international economies have a low or even a negative correlation with each other,” notes Sharath Sury. “That is, that they do not all move in the same direction at the same time.” And while the economist acknowledges that this is frequently true in very calm markets, he also observes that market distress can actually lead portfolio diversification to have negative effects for the investor.
“When markets deteriorate, investors tend to immediately increase their aversion to risk and exit risk assets en masse,” comments Sharath Sury in his statement. “When this happens, prices tend to decline across the board, and at the same time. In effect, markets become highly correlated. At this point, diversification does not help—and can actually exacerbate the situation.” The economist also points to the increased level of interrelation between different economies as further proof of the potential hazards of diversification, citing the effect Greece’s economic crisis had on the Eurozone as a chief example.
But Sharath Sury does not go as far as to suggest that portfolio diversification is imprudent. On the contrary, his statement simply advises strategy and caution. “We are starting to see increasing levels of dispersion in the economic fundamentals of various investment sectors and regions,” he says. “By taking the time to intelligently examine the underlying economic factors, investors can construct portfolios where they are exposed to lower risk and high growth areas.”
The bottom line is that portfolio diversification is a helpful tool when considered strategically, making the widespread move away from conventional wisdom a step in the right direction. “While diversification will always be an important tenet of modern portfolio management, in the present environment, intelligent diversification—via the use of prudent economic analysis and not just naively spreading assets across various sectors—is the best way to build and protect an investment portfolio,” Sharath Sury concludes.
Sharath Sury is an internationally renowned expert in economics and finance. An award-winning educator and sought-after lecturer, he currently serves as the Chairman of the Sury Institute for Financial Innovation and Risk Management (SIFIRM) and an adjunct professor of financial economics at the University of California. SIFIRM’s diverse panel of economic experts, whose initiatives have included Boards with Nobel Laureates, pioneering academics, and leading investment CEOs, seeks to bring increased innovation and devise new tools and techniques for addressing the world’s financial issues. Additionally, Sharath Sury has been quoted for his expert opinion in Bloomberg, Reuters, Fund Strategy, and other noteworthy publications.