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Write 4 page essay on the topic Investment and Analysis.Download file to see previous pages... I would like to point out that the conventional wisdom of wisdom may not necessarily break down in situat
Write 4 page essay on the topic Investment and Analysis.
Download file to see previous pages...I would like to point out that the conventional wisdom of wisdom may not necessarily break down in situations of extreme market volatility. This is because making investments is all about diversifying in the right manner using the relevant tools. In 2008 and 2009, there was the occurrence of a serious stock-market cataclysm that led to massive loss of wealth in the US. Market reports estimated that investors lost approximately $6 trillion worth of wealth. The stock-market cataclysm not only led to massive loss of wealth but also eroded investor’s faith in the conventional wisdom of diversification. However, the failure of the diversification does not arise from the concept of diversification itself. This is because diversifying investments does work especially when done with the appropriate tools. In the newspaper excerpt, the writer noted that there is a tendency of assets correlating hence limiting the opportunity for investors to diversify. Investors who record losses during periods of high market volatility are the ones who do not manage to establish a well rounded portfolio. A well rounded portfolio consists of assets that do not have the tendency of swinging up and down in correlation with each other. This means that investors need to diversify their assets to include those that have very the least correlations.In recent times, starting from the year 2000, investors who have diversified their investments among companies that have different sizes have managed to record positive gains. This can be supported by the 2002-2003 performance of the bear market (Satchwell, 2004, p. 24). During this period, the S&.P recorded a loss of 47.4 percent but small and undervalued companies produced a gain of 1.6 percent. Real investment trusts also managed to record a gain of 36.6 percent.
The market has also in recent times recorded losses as a result of diversification. The latest occurrence of a bear market resulted in small, undervalued companies losing 59.6 percent and REITs losing 68.5 percent. This clearly indicates that what many investors seem to count as diversification does not count any further. This is attributed to the prevailing market dynamics that have changed the correlation between different assets in the market.
Despite the mixed results, there is one better approach of utilizing the conventional wisdom of diversification (Jones, 2009, 200). This approach involves paying attention to the correlations of the different assets within a portfolio. Investors should consider diversifying their investments in assets that do not move in sync with each other in terms of market volatility. This can be demonstrated by an example that relates to the stock and bond markets.
Given two assets that include Stock S and Bond A, the investor has to first to determine the correlation between the two.
