Sharath Sury Critiques New Studies on Investment Diversification

NEW YORK, NY, June 28, 2012

Anyone who has ever read a book about investment, or enrolled in any kind of beginner's investment training course, has surely heard all about the importance of building a diverse portfolio. It is one of the oldest and most common pieces of investment advice. Yet, according to a new study, many investors fail to grasp exactly what diversification is, or how its meaning has changed in recent years. CBS reports new findings suggesting that "many investors fail to diversify properly," and that the meaning of proper diversification has changed in ways that many investors simply do not understand. The report has won the attention, as well as some mild criticism, from economist Sharath Sury.

Sury, a long-time critic of ineffective conventional approaches to diversification, says that the CBS report is well-intentioned but not completely helpful. In a new statement to the press, Sharath Sury says, "The article does give sage advice that 'diversification is important.' However, some of the studies quoted in the article are outdated and do not reflect today's realities."

Sury goes on to explain how today's investors might understand the concept of diversification, beyond the outdated models provided by the CBS report. "Over the past decade, correlations have been rising across diverse sectors during periods of market stress with increasing frequency," says the economist. "One contributor to this phenomenon has been the much broader use of portfolio trading (including the use of ETFs)."

"Thus, we have seen commentators more broadly speak of 'risk on/risk off' rather than 'sector rotation," continues Sharath Sury. "What this means is that investors are beginning to treat risky investments (e.g., stocks) as a unit, rather than as individual securities. As a result, when the market undergoes stress, investors simply move out of the entire asset class en masse. That action creates an increased correlation among all sectors, and thus reduces the benefits of diversification."

Ultimately, Sury says, investors should not come away with the idea that diversification is unimportant--far from it. Rather, he stresses the need to understand the difference between strategic and naive diversification. "This is not to say that diversification is not important. It is," he confirms. "However, naive diversification across sectors without considering how the correlations among those sectors may change through time--and especially during times of market distress--will not be as effective. It is critical to maintain vigilance on how different stocks in different sectors correlate during different market regimes."

The economist's bottom line is simply a call for prudence. "Thoughtful economic analysis can help investors understand in what regime the markets are currently operating, and thus better inform how best to diversify across sectors or asset classes," he observes.

ABOUT:

Sharath Sury is an internationally renowned expert in economics and finance. An award-winning educator and sought-after lecturer, he currently serves as the Chairman of the Sury Institute for Financial Innovation and Risk Management (SIFIRM) and an adjunct professor of financial economics at the University of California. SIFIRM's diverse panel of economic experts, whose initiatives have included Boards with Nobel Laureates, pioneering academics, and leading investment CEOs, seeks to bring increased innovation and devise new tools and techniques for addressing the world's financial issues. Additionally, Sharath Sury has been quoted for his expert opinion in Bloomberg, MarketWatch, Reuters, Fund Strategy, The Hedge Fund Law Report, and other noteworthy publications.