The old adage “don’t put all your eggs in one basket” certainly applies to investors. Unless you are a market oracle, owning a diverse portfolio is vital to help limit downside risk. Many investors know that a good asset mix is key to earning steady returns and invest wisely. Or so they think.
The orthodox rule of a 60% stocks/40% bonds split of your capital has seen success in years past. But as Bob Dylan says, “the times they are a changin’.” (read our free special report to learn how to diversify in 2017. Download here)
Causes of Correlation
A side-effect of globalization is that asset classes are now more tightly correlated than ever. Correlation is measured on a scale from +1 to -1. Assets that move in perfect tandem are rated a +1. Those that move in opposite directions are scored a -1.
The latest Robinhood Investors Conference is in the books, and some hedge funds made an appearance at the conference. In a panel on hedge funds moderated by Maverick Capital's Lee Ainslie, Ricky Sandler of Eminence Capital, Gaurav Kapadia of XN and Glen Kacher of Light Street discussed their own hedge funds and various aspects of Read More
From 1980–1989, US and international stocks had a correlation of 0.47. From 2000–2015, the correlation nearly doubled to 0.88. It’s a similar story in the S&P. The variance between the best and worst performing sectors in 2007 was 55%. The average from 2012–2015 was just 28%.
Globalization has been a big contributor, but central banks’ actions post financial crisis have also played a part. Monetary policy has been the main driver of economic growth since 2008. This caused normally low correlating assets to rise in unison.
From 1990–1999, a portfolio of 60% stocks, 40% bonds returned 14%, with 9.00% volatility. From 2010–2015, the same blend returned 6.6%, with 9.15% volatility. It also had a near-perfect 0.99 correlation to the model “all-stock” portfolio.
The global reaction to the 2013 “taper-tantrum” showed just how “joined” world markets have become.
During a Q&A event in 2013, then Fed chairman Ben Bernanke said he expected to begin tapering the Fed’s asset purchases later that year. That set off a bout of global volatility. The US 10-year Treasury yield soared 140 basis points, while risk assets with no direct US links fell rapidly.
Today, the Fed’s actions can exert even greater force.
An improving US economy seems to warrant higher interest rates—and Janet Yellen has duly obliged. When the Fed bumped rates by 25 basis points in December, the dollar soared and US yields spiked. However, the global reaction is the real story. After the hike, emerging market currencies sold off sharply, as did European stocks and bonds.
As ingrained portfolio strategies fail to bear the effective, how can investors achieve asset diversity?
The Answer Is P2P Lending
Investors have options that offer low-to-negative correlations to stocks and bonds. They would include real estate and various hedge funds.
While these investment channels can broaden asset diversity, they bring another set of issues to the table. Real estate can be illiquid, even at the best of times. And hedge funds have struggled to adapt to the new investment world.
So, how can everyday investors achieve investment diversity?
There’s a new asset class in town, and it’s altering the investor and financial landscape. It’s called Marketplace Lending (MPL), also known as Peer-to-Peer (P2P) Lending.
MPL started in the US in 2006 and has gained real traction. The two largest MPL platforms, Lending Club and Prosper, have issued $29 billion in loans since 2006. When you see the returns that MPL can deliver, there’s little wonder about its growth.
MPL investors are averaging 7% returns on 36-month loans. Even better, MPL loans have very low correlations to other assets as the table below shows.
In a high-correlation world, this is a big opportunity for astute investors.
Unlike other options I cited above, it’s easy to invest in MPL. Investors can setup an account in one day and invest as little as $25 per MPL loan. Once invested, you begin receiving payments within 30 days.
Like every investment, MPL does carry some risk. As loans are unsecured, investors must be fully informed about how the industry works.
And we’ve made it super easy to do that. You can grab our free report, Welcome to the Bank of You, to learn everything there is to know about MPL.
As past downturns’ have shown, diversification is key to limiting losses. After all, if your portfolio falls 50% and later rises 90%, it’s still down 5%. The new world investment order is one where asset returns continue to converge. MPL offers investors a chance to build a truly diversified portfolio.
Free Report Reveals: How to Join the P2P Lending Revolution and Earn Yields of as Much as 10.39%
The P2P lending technology is turning the traditional banking industry upside down. With almost no effort and risk, you can join the revolution in minutes and earn market-beating yields on high-grade P2P loans. Grab our free report, Welcome to the Bank of You, and learn everything you should know about P2P lending to get started. Click here to download.
Article By Stephen McBride – Garret/Galland