When Diversification Failed

GMO

Ben Inker

Article

1 Pages

GMO examines why diversification among risk assets failed during the Global Financial Crisis, arguing conventional quantitative models and efficient frontier portfolios overlooked correlated losses, timing risk, and career pressures. Ben Inker advocates more dynamic asset allocation to better manage large drawdowns and support long-term portfolio resilience.

Key Takeaways

Crisis Protection Disappeared: During weeks when the S&P 500 declined more than 10%, a 50/50 international portfolio fell 13.5%, compared with 13.2% for the index.v
Valuation Drove Outcomes: From September 1998 to September 2008, emerging equities returned 12.4% annually after inflation, while the S&P 500 returned just 0.2%.
Broader Mix Helped: Between June 2000 and September 2002, MSCI World declined 47%, while an equally weighted portfolio of risk assets fell 26%.Between June 2000 and September 2002, MSCI World declined 47%, while an equally weighted portfolio of risk assets fell 26%.
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