Diverse portfolios ensure at least some investments will be in the capital market's top performing category at any given time, regardless of what's hot and what's a flop. And you will never be fully invested in the year's losers. Different securities tend to perform uniquely at any point of time and with a diverse mix of assets, a portfolio will be less likely to suffer extreme losses that would impact concentrated portfolios. At the most basic level it is simple practice of not putting all your eggs in one basket; yet, at the root of diversification is a concept called correlation, which is a measure of how the returns of investment asset classes move together. Studies suggest when you collect different assets that have low correlations in a portfolio, you may be able to get more return while taking on the same level of risk, or the same returns
By Ashish Shah and Ivan Rudolph-Shabinsky
Investors who chose high-yield bank loans over high-yield bonds earlier this year, expecting to be insulated against rising rates, might be surprised to find that bonds might have worked out better.
While the 10-year US Treasury yield rose about 80 basis points from January 2 through November 1, bank loans’ floating interest rate—much touted as a benefit—has actually been a detriment.
As we’ve pointed out, investors who rushed into bank loans in recent years may not have fully considered the potential risks, which can outweigh the perceived benefits, such as loans’ floating rate feature, their seniority in an issuer’s capital structure in the event of bankruptcy and the perception that loans offer a better yield than most other investments. Now, a host of other concerns have arisen:
A staggering number of loans are being refinanced—and issuers hold the cards. The bank-loan market