“In a crisis, all correlations approach one.”
This is the counter-argument to my note about diversification yesterday. In other words, there are limits to how much you can reduce your risk. To use an agricultural metaphor, planting corn, beans, and squash may limit your losses if corn-borers proliferate, but it doesn’t help much when a swarm of locusts appears.
That’s what we’ve witnessed over the past year. The best performing stock markets, globally, are still down around 40%. Bonds usually hedge stocks, but the only positive returns there have been US Treasury bonds. Most other bond markets have gotten killed.
General bear markets, like locust infestations, are rare, but they serve a purpose. When the land is cleared, plants with the strongest roots come back quickly. By clearing out weak and imprudently managed companies, the markets’ decline strengthens the economy’s long-run potential. In this case the global economy is being refined. That which does not kill us should make us stronger.
Douglas R. Tengdin, CFA
Chief Investment Officer
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