A new report in this month's Journal of Financial Planning suggests what asset classes may give the most diversification benefits to an investment portfolio.
A study by William Coaker II examined the correlation among returns of different asset classes. It found that natural resources and foreign bonds have high diversification benefits, even though they are often neglected in putting together a portfolio. But returns from growth U.S. stocks are highly correlated with returns from broader indexes (so-called "blend" styles), and using these two groups together does little to reduce risk.
Coaker concludes: "Investors can improve return and reduce risk by better emphasizing low-correlated assets that still meet return objectives."
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