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August | Traffic Jam
A well-diversified portfolio is based, in part, on the low correlation between its constituent asset classes. If this correlation changes, the portfolio may not be as well diversified as the investor previously thought. This is what happened during the current downturn: Because correlations between many asset classes went up, the diversification benefit was diminished. The image highlights the correlation of nine asset classes with the market for three time periods: before the current downturn, during the current downturn, and for the entire period since January 1980.
September | Helpful TIPS
Inflation is normally a significant cause of concern for consumers and investors alike. Not only do rising prices put pressure on people's spending habits, but high inflation can also eat into investment returns. Treasury inflation-protected securities (TIPS) may offer a cushion during inflationary periods. They are fixed-income investments whose coupon payments change with the inflation rate: If inflation rises, the interest payment increases, and if inflation drops, the interest payment decreases. The image shows the performance of TIPS for the years since 1989 in which inflation was higher than its long-term average.
The inflation statistics commonly reported only present the price change in goods that the "average" consumer purchases. Each good or service that comprises the overall measure of inflation has its own growth rate, and many investors spend more on higher inflation items. Therefore, investors should plan for the real cost of meeting their goals. The image illustrates the effect of three types of inflation on an investment of $1,000 in stocks and bonds - overall U.S. inflation, medical care inflation, and college inflation over the past 20 years.
Many companies offer shares of their own stock as part of employee compensation plans, and many employees have a high percentage of their assets invested in company stock. A 2005 research study calculated that employees in this situation sacrifice significant value. The image illustrates the value of each retirement-plan dollar invested in company stock for 5-, 10- and 15-year holding periods.
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