FORTUNE Magazine – When it comes to investing, diversification is the closest thing to a free lunch. Simply by spreading money around unrelated investments – municipal bonds that zig when Wal-Mart and Microsoft shares zag – investors can reduce risk without reducinglong-term returns. At least, that’s always been the rule of thumb.
But what happens if the asset classes whose price movements are out of sync with the U.S. stock market suddenly stop marching to their own drummers? That, says Merrill Lynch strategist Kari Bayer Pinkernell, is the predicament in which investors find themselves today.
Don’t get Pinkernell wrong. Like most everyone in the Wall Street advice business, she’s a firm believer in diversification. She wants investors to spread their risk by mixing in bonds, foreignstocks, commodities, and real estate with the large-cap U.S. stocks and funds that tend to make up their core holdings.
Such common-sense advice took on added urgency in the aftermath of the 2000 market crash, when many people found themselves calamitously overexposed to all things technology. (See Andy Serwer’s column, “Mary Meeker 2.0”) Back then, Pinkernell and colleague Richard Bernstein repeatedly bemoaned the lack of investor interest in energy and commodities.
“During the tech bubble, everyone put their eggs in one basket,” she says.
