AQR’s Cliff Asness says a “preponderance” of investors have too much equity exposure. Step 1 of achieving real diversification, according to Asness, is to take a look at your asset class allocations and make sure they’re properly balanced. The traditional “60/40” portfolio may seem balanced, but Asness points out that the larger stock portion accounts for much more risk than the smaller fixed-income portion.
Step 2 is to find strategies and assets with low correlation to traditional asset classes. Asness recommends risk-parity products, which his firm AQR provides but so do others. Asness also says that global diversification is important, especially in terms of equities, and he’s surprised that it’s still controversial. Asness says he’s a “patriot,” but the idea that the U.S. could never become the world’s “problem child” is “arrogant” in his view. Global equities won’t help much in a crash, but they do help balance out returns over 5, 10, and 20-year periods, according to Asness.
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