Diversification has been called the only free lunch in investing. It is a way to reduce your risk for the same return. And during most times in history that has been true.
What has happened recently and in other times of financial crisis is that asset classes that are normally not correlated start moving in the same direction. Just about everything is moving down.
Take a look at what has happened from March 1 to today (March 21). For convenience I used some Vanguard mutual funds and a gold ETF, you can pick your favorite funds or ETFs.
| Gold | GLD | -5.6% |
| Commodities | VCMDX | -14.6% |
| Long-term Treasuries | VLGSX | 0.7% |
| Short-term Treasuries | VSBSX | 0.9% |
| TIPS | VAIPX | -3.6% |
| Long-term Corporate Bonds | VWETX | -16.2% |
| S&P 500 | VFIAX | -22.2% |
So if you owned only treasuries or cash you’re basically breaking even. If you were diversified across some or all of these asset classes, you’re losing money, whatever your allocation to each asset class might be.
Don’t get me wrong, diversification is a good thing almost all the time. This is just another indicator of how unusual these times are.