By combining a broader variety of assets that have little to no correlation to one another, we can reduce downside exposure right out of the gate.
Beginning with a truly diversified portfolio is the first step in executing a good defense. The traditional definition of diversification is very broad and overarching. An all equity portfolio might be pitched as "diversified" if it holds stocks across multiple styles (value & growth), market caps (small, mid, & large), and potentially even geography (international & domestic). Despite their differences, the correlation across these categories is extremely high and provides little in the form of true diversification. In other words holding more of the same does not make you diversified. Diversification 2.0 is a portfolio construction methodology that extends beyond stocks and bonds to include additional asset classes that exhibit much less correlation to each other, thereby adding true diversification.
While stocks and bonds are key components of our portfolio construction, we also include core holdings in Commodities, Foreign Currencies and a variety of Absolute Return strategies. By combining a broader variety of assets that have little to no correlation to one another, downside exposure and expected volatility is reduced right out of the gate. A portfolio built on this foundation has a better chance of weathering turbulent market environments and producing better performance over full market cycles.The ultimate goal of Diversification 2.0 is to move "up and to the left" on the risk-return scatterplot. Put another way, we want to construct portfolios that will deliver higher returns with less risk compared to traditional stock-bond portoflios.