The fear of contagion leading to a widening global debt crisis is causing movements in the securities markets to increasingly respond in tandem. The result is that investors feel as if correlation is increasing between asset classes. That leads some investors to wonder if the traditional portfolio diversification will adequately protect them in this current environment. If you are asking the question:

How should I diversify my portfolio when many assets seem to be equally volatile?

The answer, according to Howard Simons, as reported in the Wall Street Journal by Jason Zweig, is to think about the two risks at stake in the current global debt crisis – inflation and currency weakness – and look for sectors to which those risks don’t apply.

Consider replacing bonds and financials with utilities. With minimal revenues outside of the U.S., they are not subject to currency risks. “And since the rates they charge their customers tend to move upward at a fairly steady pace regardless of inflation rates, utilities are relatively insulated against those risks as well… Utilities have always been a way to get decent income; now they look like an intriguing way to get at least some protection from further contagion.”

Carla Fried and her colleagues report in Money Magazine that fixed-income investors will have a hard time making money in the year ahead. The take away: Diversify your bond portfolio with corporate debt and focus equity exposure to relatively safe companies.

However, Richard Lehmann, contributor to Forbes, reports a different perspective. He thinks growth investors should be more concerned than income investors. In fact, he “cannot recall a more promising environment for income investing than today.”

He recommends diversifying with a variety of income yielding sources, including bonds (regardless of its duration or its investment grade rating), high-dividend blue chip preferred stock, energy trusts, commodities and real estate.

Tell Us:

How are you protecting your portfolio from the seemingly perfect correlation of the market?

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